Question

Question: Cost of goods sold as reported in the income statement will be less than cash paid to suppliers if:

Correct Answer: The decrease in accounts payable is equal to the increase in inventory during the period.

Can you please explain this to me like I'm 5? I'm having a hard time conceptualizing why this is the correct answer and the relationship between COGS, Inventory, Accounts Payable, and Cash in general. Please explain it in a way that if the professor were to change the wording of the question I'd be able to understand it regardless. I appreciate it.

Answer 1

Payment to Suppliers = Cost of goods sold + Decrease in Accounts payable + Increase in Inventory

From the above equation it is evident that payment to suppliers will always be higher than COGS (OR COGS as reported in the income statement will always be less than cash paid to suppliers) if there is a Decrease in Accounts payable coupled with Increase in Inventory (it is not necessary that decrease in accounts payable should be equal to the increase in inventory)

Hence. in the extant case since there is decrease in accounts payable coupled with increase in inventory, even though they are equal, the Cost of goods sold as reported in the income statement will be less than cash paid to suppliers.

Hence, Correct Answer is The decrease in accounts payable is equal to the increase in inventory during the period