Martinez Company uses the direct method to prepare its statement of cash flows. It has reported Cost of Goods Sold of $95,000 on its income statement for the year 2015. If the balance in the Inventory account has gone down by $6,000 during the year, then $6,000 will have to be added to $95,000 as part of the process to calculate payments to suppliers for inventory purchases.

Question

Quizplus · Accepted Answer

When using the direct method to prepare the statement of cash flows, inventory changes are treated as an adjustment to Cost of Goods Sold. Therefore, the decrease of $6,000 in the Inventory account would be subtracted from the $95,000 reported as Cost of Goods Sold, resulting in a lower amount for payments to suppliers for inventory purchases.

Martinez Company Uses the Direct Method to Prepare Its Statement