Toro Company recognized $655,000 of cost of goods sold in 2006, in addition its implementation of a just-in-time inventory system allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2006. How much cash did Toro spend for inventory in 2006?
A) $655,000
B) $980,000
C) $560,000
D) $620,000

Question

Quizplus · Accepted Answer

Toro spent $655,000 on inventory in 2006. This is because the cost of goods sold is equal to the beginning inventory plus purchases minus the ending inventory. In this case, the beginning inventory is $325,000, the cost of goods sold is $655,000, and the ending inventory is $230,000. Therefore, purchases must have been $980,000 ($655,000 + $325,000 - $230,000). However, Toro implemented a just-in-time inventory system, which allowed it to reduce its inventory from $325,000 at the beginning of the year to $230,000 at the end of 2006. This means that Toro did not actually spend $980,000 on inventory in 2006. Instead, it spent $655,000 on inventory and reduced its inventory by $95,000 ($325,000 - $230,000). Therefore, Toro spent $560,000 ($655,000 - $95,000) on inventory in 2006.

Toro Company Recognized $655,000 of Cost of Goods Sold in 2006