Assume that the direct method is used to prepare the operating activities section of the statement of cash flows.Which of the following statements is correct concerning a decrease in Accounts Payable?
A)Since the cash payments were more than the credit purchases,the decrease must be added to purchases to calculate cash payments to suppliers.
B)Since the cash payments were less than credit purchases,the decrease must be added to purchases to calculate cash payments to suppliers.
C)Since the cash payments were more than credit purchases,the decrease must be subtracted from purchases to cash payments to suppliers.
D)Since the cash payments were less than credit purchases,the decrease must be subtracted from purchases to calculate cash payments to suppliers.

Question

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Typically,companies buy inventory on account from suppliers (as indicated by an Accounts Payable balance on the balance sheet).Consequently,we need to consider more than just the change in Inventory to convert Cost of Goods Sold to cash paid to suppliers.The credit purchases and payments that are recorded in Accounts Payable must also be considered.Credit purchases increase Accounts Payable and cash payments decrease it.In summary,to convert Cost of Goods Sold to a cash basis,you must consider changes in both Inventory and Accounts Payable.If Accounts Payable decreases,that means that the cash payments were more than the credit purchases.As a result,the decrease must be added to purchases to calculate cash payments to suppliers.

Assume That the Direct Method Is Used to Prepare the Operating