Qtopia Company uses the direct method to prepare its cash flow statement. It has reported Cost of sales of $70 000 on its income statement for the year 2014. If the balance in the inventory account has gone up by $2 000 during the year, then $2 000 will have to be added to $70 000 as part of the process to calculate payments to suppliers for inventory purchases.

Question

Quizplus · Accepted Answer

The increase in inventory balance means that the company has purchased more inventory than it has sold. This means that the company has paid more to suppliers than the amount of cost of sales reported on the income statement. Therefore, $2,000 will have to be added to $70,000 as part of the process to calculate payments to suppliers for inventory purchases.

Qtopia Company Uses the Direct Method to Prepare Its Cash