A company’s Inventory balance at the end of the year was $188,000 and $200,000 at the beginning of the year. Its Accounts Payable balance at the end of the year was $84,000 and $80,000 at the beginning of the year, and its cost of goods sold for the year was $720,000. The company’s total amount of cash payments for merchandise during the year equals:
A) $704,000.
B) $712,000.
C) $720,000.
D) $728,000.
E) $736,000.
The correct answer and explanation is :
To calculate the total cash payments for merchandise during the year, we use the following formula:
[
\text{Cash Payments} = \text{Cost of Goods Sold} + \text{Increase in Inventory} – \text{Increase in Accounts Payable}
]
Step 1: Identify the Given Information
- Beginning Inventory = $200,000
- Ending Inventory = $188,000
- Beginning Accounts Payable = $80,000
- Ending Accounts Payable = $84,000
- Cost of Goods Sold (COGS) = $720,000
Step 2: Calculate the Change in Inventory
Change in Inventory = Beginning Inventory – Ending Inventory
[
200,000 – 188,000 = 12,000
]
Since inventory decreased, it means less cash was used to purchase inventory.
Step 3: Calculate the Change in Accounts Payable
Change in Accounts Payable = Ending Accounts Payable – Beginning Accounts Payable
[
84,000 – 80,000 = 4,000
]
Since accounts payable increased, it means the company delayed more payments, reducing the cash outflow.
Step 4: Calculate the Total Cash Payments
[
\text{Cash Payments} = 720,000 – 12,000 + 4,000
]
[
\text{Cash Payments} = 712,000
]
Answer:
The total amount of cash payments for merchandise during the year is $712,000, which corresponds to option B.
Explanation:
This calculation follows the logic that the company’s cost of goods sold represents the inventory that was used up. However, if inventory decreased, it means the company bought less than it used, so we subtract the decrease. If accounts payable increased, it means the company delayed more payments, reducing actual cash outflows, so we add this back. Hence, the correct total payment is $712,000.