Martinez Installations Company uses the direct method to prepare its statement of cash flows.It has reported Cost of Goods Sold of $95,000 on its income statement for the year 2015.If the balance in the Inventory account has gone down by $6,000 during the year,then $6,000 will have to be added to $95,000 as part of the process to calculate payments to suppliers for inventory purchases.

Question

Quizplus · Accepted Answer

The direct method of preparing the statement of cash flows involves adjusting net income for changes in non-cash balance sheet items to arrive at cash flows from operating activities. In this case, the decrease in inventory indicates that inventory was sold during the year, and therefore the cost of goods sold was paid out to suppliers earlier in the year. Thus, there is no need to add back the decrease in inventory to arrive at payments to suppliers for inventory purchases.

Martinez Installations Company Uses the Direct Method to Prepare Its