Urban Installations Company uses the direct method to prepare its statement of cash flows.Urban has reported cost of goods sold of $95,000 on its income statement for 2018.If the balance in the Merchandise Inventory account decreased by $6,000 during the year,then $6,000 needs to be added to $95,000 to calculate payments to suppliers for inventory purchases.

Question

Quizplus · Accepted Answer

The statement is false. When using the direct method to prepare the statement of cash flows, the cost of goods sold is not used to calculate payments to suppliers for inventory purchases. Instead, the change in the Merchandise Inventory account is used. In this case, since the Merchandise Inventory decreased by $6,000, this means that Urban would have purchased $6,000 less inventory than what was sold, so $6,000 needs to be subtracted from the cost of goods sold of $95,000 to calculate payments to suppliers for inventory purchases. The correct calculation would be:

Payments to suppliers for inventory purchases = Cost of goods sold - Decrease in Merchandise Inventory
Payments to suppliers for inventory purchases = $95,000 - (-$6,000)
Payments to suppliers for inventory purchases = $101,000

Urban Installations Company Uses the Direct Method to Prepare Its