Exercise-4 (Cash paid to suppliers – formula approach)

By: Rashid Javed | Updated on: October 24th, 2021

Exercise-4 (a):

The Lucky company uses direct method to prepare its statement of cash flows and wants your assistance in computing the total cash paid to suppliers of inventory during the year 2016. The company presents you the following information about its inventory, accounts payable and cost of goods sold for the year 2016:

  • Inventory on January 1, 2016: $40,000
  • Inventory on December 31, 2016: $75,000
  • Accounts payable on January 1, 2016: $22,000
  • Accounts payable on December 31, 2016: $35,000
  • Cost of goods sold for the year 2016: $350,000

Required: Calculate total cash paid to suppliers of inventory by Lucky company during the year 2016.

Solution:

exercise-4-socf-img1

*Increase in inventory during the period: 75,000 – 40,000 = 35,000
**Increase in accounts payable during the period: 35,000 – 22,000 = 13,000

Exercise-4 (b):

The Metro company’s cost of goods sold for the current year is $145,000. The beginning and ending balances of its merchandise inventory and accounts payable are given below:

  • Merchandise inventory at the beginning of the year: $40,000
  • Merchandise inventory at the end of the year: $32,000
  • Accounts payable at the beginning of the year: $29,000
  • Accounts payable at the end of the year: $15,000

Required: Compute the total cash paid to suppliers of inventory during the period using above information.

Solution:

exercise-4-socf-img2

*Decrease in inventory during the period: $40,000 – $32,000 = $8,000
**Decrease in accounts payable during the period: $29,000 – $15,000 = $14,000

A D V E R T I S E M E N T
5 Comments on Exercise-4 (Cash paid to suppliers – formula approach)
  1. lili

    Hello, there is something which i don’t understand:
    if the inventory increases, it is bad right? so why to we additional it on exercice one with COGS (+35 000$)?

    tHANKS

    1. Malik Meri

      Because when Inventory increases it means that inventory was “purchased” and thus cash was paid in exchange for it, on the other side, if the Accounts Payable account balance decreases, it indicates that cash was paid to suppliers that is why it is added back in the calculation, if the AP account balance increases, it means that inventory was purchased but not paid for thats why it is deducted (because no cash was paid it must be excluded from the calculation of cash paid to suppliers).
      Kind regards.

  2. annie

    what if there is no cost of goods sold in the equation and the answer is a negative figure? what does that represent

  3. DESSALEGNE MULU

    Let me make it easy for you
    First let us calculate the purchase as follows:
    Beg Inv + purc – End Inv = CGS
    Purchase = 145000+32000-40000
    = 137,000.00
    Then add the purchase plus the accounts payable diffence b/c there is a cash paid 14000.00 as the payable acct is decreased .
    so , 137000+14000.00= 151000.00 total cash paid

  4. ayanda dotye

    it makes e learning to be excellent , it was a wonderful practice

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