Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported Cost of goods sold of $70,000 on its income statement for the year 2012. If the balance in the inventory account has gone up by $2,000 during the year, then $2,000 will have to be added to $70,000 as part of the process to calculate payments to suppliers for inventory purchases.

Question

Quizplus · Accepted Answer

When using the direct method for the statement of cash flows, an increase in inventory indicates that the company purchased more inventory than it sold. Therefore, to calculate cash payments to suppliers, the increase in inventory ($2,000) is added to the cost of goods sold ($70,000), reflecting the actual cash outflow for inventory purchases.

Qtopia Company Uses the Direct Method to Prepare Its Statement