The Little Company uses the cash basis of accounting. Little Company made $28,000 in payments to its suppliers during the year. Little's beginning inventory was $2,000, and its ending inventory was $1,000. In addition, Little had a beginning accounts payable of $7,000 and an ending accounts payable of $4,000. What is Little's cost of goods sold under the accrual basis of accounting?

Question

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Under the accrual basis of accounting, cost of goods sold is calculated as beginning inventory plus purchases minus ending inventory. In this case, beginning inventory is $2,000, purchases are $28,000, and ending inventory is $1,000. Therefore, cost of goods sold is $2,000 + $28,000 - $1,000 = $29,000. However, since Little Company uses the cash basis of accounting, we need to adjust for the change in accounts payable. The increase in accounts payable ($7,000 - $4,000 = $3,000) represents expenses that have been incurred but not yet paid. Therefore, we need to add $3,000 to cost of goods sold, which gives us a total cost of goods sold of $29,000 + $3,000 = $32,000.

The Little Company Uses the Cash Basis of Accounting