Clyde's Clothing Inc. comparative balance sheets and income statements showed the following information for 2010 and 2011: Clyde's accounts payable balances are composed solely of amounts due to suppliers for purchases of inventory. What is the amount of cash payments for inventory that Clyde should report on its 2011 statement of cash flows assuming that the direct method is used?

Question

Clyde's Clothing Inc. comparative balance sheets and income statements showed the following information for 2010 and 2011:  Clyde's accounts payable balances are composed solely of amounts due to suppliers for purchases of inventory. What is the amount of cash payments for inventory that Clyde should report on its 2011 statement of cash flows assuming that the direct method is used?

Quizplus · Accepted Answer

To calculate the cash payments for inventory, we need to calculate the change in accounts payable and add it to cost of goods sold. The change in accounts payable from 2010 to 2011 is:

Accounts payable 2011 - Accounts payable 2010 = $1,110,000 - $697,000 = $413,000 increase.

We then add this increase to cost of goods sold for 2011 of $6,057,000 to get:

Cash payments for inventory = Cost of goods sold + Increase in accounts payable
= $6,057,000 + $413,000
= $6,470,000

Therefore, the amount of cash payments for inventory that Clyde should report on its 2011 statement of cash flows assuming the direct method is $413,000.