Grower Company reported cost of goods sold of $700,000 for the year ended December 31, 2012. During the year, inventories decreased $12,000 and accounts payable decreased $18,000. The cash payments to suppliers in 2012, using the direct method was:

Question

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The cash payments to suppliers can be calculated by adjusting the cost of goods sold for the changes in inventory and accounts payable. The formula is: Cash Payments to Suppliers = Cost of Goods Sold + Decrease in Inventory + Decrease in Accounts Payable. Plugging in the given values: $700,000 + $12,000 + $18,000 = $730,000. However, since accounts payable decreased, it means the company paid more to suppliers than the purchases recorded, so the correct adjustment is: $700,000 - $12,000 (decrease in inventory, meaning less was spent on inventory than recorded in COGS) + $18,000 (decrease in accounts payable, meaning cash payments were higher) = $706,000.

Grower Company Reported Cost of Goods Sold of $700,000 for the Year