Question

The cost of goods sold during the year was $45,000. Inventories were $13,500 and $10,500 at the beginning and end of the year, respectively. Accounts payable (all owed to merchandise suppliers) were $7,000 and $5,000 at the beginning and end of the year, respectively. Using the direct method of reporting cash flows from operating activities, cash payments for merchandise total

a. $46,000
b. $44,000
c. $50,000
d. $40,000

Answer 1

To find the cash payments for merchandise, we adjust the cost of goods sold by the inventory decrease of $3,000 and the accounts payable decrease of $2,000, resulting in cash payments totaling $44,000.

Step-by-step explanation:

The calculation for the cash payments for merchandise using the direct method involves adjusting the cost of goods sold for changes in inventory and accounts payable. We start with the cost of goods sold, which is given as $45,000. We then take into account the change in inventory levels. The beginning inventory was $13,500 and the end inventory was $10,500, which amounts to a decrease in inventory of $3,000 ($13,500 - $10,500).

Next, we examine the change in accounts payable. Accounts payable was $7,000 at the beginning of the year and $5,000 at the end, representing a decrease of $2,000 ($7,000 - $5,000). To reflect the actual cash spent on merchandise, we subtract the decrease in inventory and add the decrease in accounts payable to the cost of goods sold:

$45,000 (cost of goods sold) - $3,000 (decrease in inventory) + $2,000 (decrease in accounts payable) = $44,000.

The correct answer is (b) $44,000.