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 accounts payable (for inventory suppliers only) has gone down by $5,000 during the year, then $5,000 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, a decrease in accounts payable indicates that payments to suppliers exceed the cost of goods sold. Therefore, to calculate the actual cash payments to suppliers, you add the decrease in accounts payable to the cost of goods sold.

Qtopia Company Uses the Direct Method to Prepare Its Statement