Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported Cost of Goods Sold of $85,000 on its income statement for the year 2015. If the balance in Accounts Payable, for inventory suppliers only, has gone down by $8,000 during the year, then $8,000 will have to be subtracted from $85,000 as part of the process to calculate payments to suppliers for inventory purchases.

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In the direct method, a decrease in Accounts Payable indicates that more cash was paid to suppliers than the cost of goods sold, so $8,000 should be added to $85,000 to calculate cash payments to suppliers.

Qtopia Company Uses the Direct Method to Prepare Its Statement