Cost of merchandise sold for the year was $850,000.Inventories were $60,000 and $90,000 at the beginning and end of the year,respectively.There were no changes in accounts payable from the beginning to the end of the year.Cash payment for merchandise to be reported on the cash flow statement using the direct method is:

Question

Quizplus · Accepted Answer

The direct method of cash flow statement reports cash transactions, and the cost of merchandise sold is a cash transaction. To calculate the cash payment for merchandise, we need to subtract the change in inventory from the cost of merchandise sold, which gives us the cash payments made to suppliers during the year. 
Cash payment for merchandise = Cost of merchandise sold - Decrease in inventory
Cost of merchandise sold = $850,000
Decrease in inventory = $90,000 - $60,000 = $30,000
Cash payment for merchandise = $850,000 - $30,000 = $820,000
However, we need to add any increase in accounts payable during the year since it represents a reduction in cash payments to suppliers. Since there were no changes in accounts payable from the beginning to the end of the year, we do not need to make any adjustments. 
Therefore, the cash payment for merchandise to be reported on the cash flow statement using the direct method is $880,000 (Option D).

Cost of Merchandise Sold for the Year Was $850,000