In a company that uses the direct method to prepare the statement of cash flows, the amount of cash it uses to purchase inventory is computed as
A)cost of goods sold plus ending inventory.
B)cost of goods sold plus ending inventory, plus beginning inventory.
C)beginning inventory minus ending inventory, minus cost of goods sold.
D)cost of goods sold plus ending inventory, minus beginning inventory.

Question

Quizplus · Accepted Answer

The direct method calculates the cash inflows and outflows directly from operating activities, which includes cash used for purchasing inventory. The amount of cash used to purchase inventory can be calculated as the cost of goods sold plus ending inventory, minus beginning inventory. This is because the cost of goods sold reflects the cost of the inventory that was sold, and the ending inventory reflects the cost of the inventory that was purchased but not yet sold. By subtracting the beginning inventory from the sum of the cost of goods sold and ending inventory, we get the amount of cash used to purchase inventory. Therefore, the correct choice is D.

In a Company That Uses the Direct Method to Prepare