Last year Cumberland Corporation reported a cost of goods sold of $120,000. Inventories increased by $35,000 during the year, and accounts payable increased by $20,000. The company uses the direct method to determine the net cash provided by (used in) operating activities on the statement of cash flows. The cost of goods sold adjusted to a cash basis would be:
A) $135,000
B) $100,000
C) $155,000
D) $105,000

Question

Quizplus · Accepted Answer

The cost of goods sold adjusted to a cash basis is calculated by starting with the reported cost of goods sold and adjusting for changes in inventory and accounts payable. Here, the cost of goods sold is $120,000, inventories increased by $35,000, and accounts payable increased by $20,000. To adjust to a cash basis, you subtract the increase in inventory (because more inventory was purchased than was used in the cost of goods sold) and add the increase in accounts payable (because this increase represents goods received but not yet paid for). Therefore, the calculation is $120,000 - $35,000 + $20,000 = $105,000.

Last Year Cumberland Corporation Reported a Cost of Goods Sold