Question

Each year, Grey Mountain Enterprises (GME) prepares a reconciliation schedule that compares its income statement with its statement of cash flows on both the direct and indirect method bases. In its 2021 income statement, GME reported $440,000 for the cost of goods sold. GME paid inventory suppliers $380,000 in 2021, and its inventory balance decreased by $41,000 during the year. In its reconciliation schedule, GME should:

Answer 1

The GME should reveal or provide a $19,000 an adjustment positive to net income under the indirect method for the increase in accounts payable.

Step-by-step explanation:

Solution

Given that:

The Cost of goods sold = $440,000

Less: Inventory balance decrease = $41000

Thus,

The cost of goods - Inventory balance decrease is given as :

$440000-$41000 = $399000

So,

The Inventory purchases during the period =$399000 and the Less: Payment to inventory suppliers= $380000

The increase in accounts payable is calculated as follows:

The inventory purchases during the period - payment to inventory suppliers

=$399000 - $380000 = $19,000

Hence,

The Increase in accounts payable(Current Liabilities) is reported as a positive adjustment to net income under the indirect method

This provide a $19,000 adjustment positive to net income under the indirect method for the increase in accounts payable.