Exercise-5 (Cash paid to suppliers – t accounts approach)

In exercise-4 we used formula approach to compute net cash paid to suppliers of merchandise. A more conceptual approach is however to use t-accounts for this purpose. In this exercise, we shall use the data similar to exercise-4 and work out the total cash paid to suppliers using t-accounts approach.

Exercise-5 (a):

Consider the following information of a merchandising company for the year 2022:

• Inventory on January 1, 2022: $40,000
• Inventory on December 31, 2022: $75,000
• Accounts payable on January 1, 2022: $22,000
• Accounts payable on December 31, 2022: $35,000
• Cost of goods sold for the year 2022: $350,000

Required: Calculate total cash paid to suppliers during year 2022 by preparing t-accounts.

Solution:

*These are balancing figures and have been computed as follows:

Accounts payable: (350,000 + 75,000) – 40,000 = 385,000
Cash: (22,000 + 385,000) – 35,000 = 372,000

The cash paid to suppliers during the year 2016 is $372,000.

Exercise-5 (b):

Watson Company provides you the following data for the most current period:

• Inventory at the start of the period : $40,000
• Inventory at the end of the period: $32,000
• Accounts payable at the start of the period: $29,000
• Accounts payable at the end of the period: $15,000

The cost of goods sold (COGS) for the current period is $145,000.

Required: Compute the amount of cash paid for the purchase of merchandise inventory during the period using t-accounts approach.

Solution:

*These are balancing figures and have been worked out as follows:

Accounts payable: (145,000 + 32,000) – 40,000 = 137,000
Cash: (29,000 + 137,000) – 15,000 = 151,000

The company paid $151,000 to its suppliers during the period.