Question

The following information is reported in the Operating Activities category of Gateway's statement of cash flows for 2017: Net income $1,200,000 Increase in inventories 600,000 Decrease in accounts payable related to inventories 400,000 ​ Which one of the following conclusions can be assumed from the information provided?

options:

Gateway used the direct method to determine cash flows from operating activities.

Gateway purchased more merchandise than it sold in 2017.

Cash payments for merchandise purchases were less than the amount of merchandise purchased on credit during 2017.

Cash payments for merchandise exceeded cost of goods sold by $200,000.

Answer 1

Gateway used the direct method to determine cash flows from operating activities - This statement is false since in the direct method, net income is not used.

Gateway purchased more merchandise than it sold in 2017 - This statement is false since sales amount is not given thus it cannot be determined whether Gateway purchased more merchandise than it sold in 2017.

Cash payments for merchandise purchases were less than the amount of merchandise purchased on credit during 2017 - This statement is true since inventories increased by $600,000 but accounts payable decreased by $400,000 only.

Cash payments for merchandise exceeded cost of goods sold by $200,000 - This statement is false since Cost of goods sold is not given and hence it cannot be determined whether Cash payments for merchandise exceeded cost of goods sold or not

Third option is correct.