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 2016.If the balance in accounts payable (for inventory suppliers only)has gone down by $5 000 during the year,then $5 000 will have to be added to $70 000 as part of the process to calculate payments to suppliers for inventory purchases.

Question

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When accounts payable decreases, it indicates that the company has paid off some of its previous obligations. Therefore, the decrease in accounts payable should be added to the cost of sales to determine the total cash paid to suppliers.

Qtopia Company Uses the Direct Method to Prepare Its Cash