The income statement for Glazed Ham shows cost of goods sold $840,000 and operating expenses...

Question:

The income statement for Glazed Ham shows cost of goods sold $840,000 and operating expenses (exclusive of depreciation) of $572,000. The comparative balance sheet for the year shows that inventory decreased $106,900, prepaid expenses decreased $17,000, accounts payable (related to merchandise) increased $68,900, and accrued expenses payable increased $35,000. Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

Cash Payments:

To maximize the cash available, most companies avail the credit terms provided by the suppliers and will only pay during the end of the discount period or the credit terms. Cash payments refers to cash disbursements used to pay for merchandise purchases through accounts payable, accrued expenses and related short-term liabilities.

Answer and Explanation:

The answer is (a) $664,200 paid to suppliers (b) $612,200 cash payments for operating expenses.

Given:

Cost of Goods Sold = $840,000

Decrease in Inventory = $106,900

Increase in Accounts Payable =$68,900

Operating expenses exc of dep = $572,000

Decrease in Prepaid Expense = $17,000

Increase in Accrued Expense Payable =$35,000

Computation:

1) Total Purchases = Cost of Goods Sold + Ending Inventory - Beginning Inventory

= $840,000 + 0 - $106,900

=$733,100

  • Decrease in Inventory means the Beginning Inventory is higher than Ending Inventory. Since no amount of Inventory mentioned, we will use Zero as basis.

2) Paid Purchases = Total Purchases + Beginning Accounts Payable - Ending Accounts Payable

= $733,100 + 0 - $68,900

=$664,200

  • Increase in Accounts Payable means the Beginning Accounts Payable is lower than Ending Accounts Payable.

3) Cash Payments for Operating Expenses = Paid Purchases - Beginning Prepaid Expenses + Ending Prepaid Expenses + Beginning Accrued Expense Payable - Ending Accrued Expense Payable

= $664,200 - $17000 + 0 + 0 - $35,000

=$612,200


Learn more about this topic:

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How to Manage Cash Disbursements

from Finance 101: Principles of Finance

Chapter 18 / Lesson 4
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