A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements. $$\begin{array} { | l | r | r | }
\hline & \text { End of this year } & \text { End af priar year } \
\hline \text { Accounts receivable } & \$ 110,000 & \$ 100,000 \
\hline \text { Cost af gouds sald } & 560,000 & \
\hline \text { Sales revenue } & 830,000 & \
\hline \text { Accounts payable* } & 75,000 & 67,000 \
\hline \text { Inventary } & 86,000 & 105,000 \
\hline \text { Salary payable } & 13,000 & 10,000 \
\hline \text { Salary expense } & 49,000 & 45,000 \
\hline
\end{array}$$ *Relates solely to the acquisition of inventory
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What will appear in the operating activities section related to accounts payable?

Question

A company uses the direct method to prepare the statement of cash flows.It presents the following amounts on its financial statements. $$\begin{array} { | l | r | r | } 
\hline & \text { End of this year } & \text { End af priar year } \
\hline \text { Accounts receivable } & \$ 110,000 & \$ 100,000 \
\hline \text { Cost af gouds sald } & 560,000 & \
\hline \text { Sales revenue } & 830,000 & \
\hline \text { Accounts payable* } & 75,000 & 67,000 \
\hline \text { Inventary } & 86,000 & 105,000 \
\hline \text { Salary payable } & 13,000 & 10,000 \
\hline \text { Salary expense } & 49,000 & 45,000 \
\hline
\end{array}$$ *Relates solely to the acquisition of inventory
-
What will appear in the operating activities section related to accounts payable?

Quizplus · Accepted Answer

The increase in accounts payable of $8,000 indicates that the company purchased more inventory on credit during the period. Under the direct method of preparing the statement of cash flows, changes in accounts payable are factored into the calculation of payments to suppliers. As such, the increase in accounts payable will be subtracted from purchases to determine the actual payments made to suppliers during the period. This adjustment will be included in the operating activities section of the cash flow statement. Therefore, choice A is the correct answer.

A Company Uses the Direct Method to Prepare the Statement