Question

he following selected account balances appeared on the financial statements of the Franklin Company. Use these balances to answer the question that follow. Accounts Receivable, Jan. 1 $15,511 Accounts Receivable, Dec. 31 7,552 Accounts Payable, Jan. 1 5,687 Accounts Payable, Dec. 31 7,519 Inventory, Jan. 1 9,268 Inventory, Dec. 31 15,016 Sales 74,133 Cost of Goods Sold 31,371 The Franklin Company uses the direct method to calculate net cash flow from operating activities. Assume that all accounts payable are owed to merchandise suppliers. Find the cash payments for merchandise.

Select the correct answer. $33,582 $31,371 $37,498 $35,287

Answer 1

Under the direct method to calculate net cash flow from operating activities, the cash payment for merchandise is calculated as follows;

Cash payment for merchandise = Cost of goods sold + Increase in Inventories- Increase in Accounts Payable

Cost of goods sold = $31,371

Increase in Inventories = $5,748 ($15,016 – 9,268)

Increase in Accounts Payable = $1,832 ($7,519 – 5,687)

Cash payment for merchandise = Cost of goods sold + Increase in Inventories- Increase in Accounts Payable

= $31,371 + 5,748 – 1,832

= $35,287

“Cash payment for merchandise = $35,287”