The section showing cash flow from operations, using the indirect method, for Company reported an...

Question:

The section showing cash flow from operations, using the indirect method, for Company reported an increase in inventories during the year of $1,753 million and no change in accounts payable for inventories. The direct method would show cash payments for inventory, purchased and manufactured, totaling $64,713 million. How do you calculate, and what is Company cost of goods sold for the year?

Direct and Indirect Methods to Report Cash Flow from Operations:

The accounting standards allow two methods to calculate the cash flow from operating activities; the direct and the indirect methods. The indirect method starts with the net income and adjusts that for noncash items and changes in working capital. The direct method lists the sources of the operating cash inflows and outflows.

Answer and Explanation:


To calculate the cash payments for inventory, purchased and manufactured, in the direct method, the cost of ending inventory will be added to the cost of goods sold expense because that was also paid for in cash in the period, while the cost of the beginning inventory will be deducted (because it was included in the COGS expense but was paid for in the previous year).

The cost of goods sold expense for the year was:

Cash payments for inventory purchased and manufactured $64,713 million
Increase in inventories (1,753)*
Cot of Goods Sold Expense $62,960
* It was added to calculate the cash payments, as we have seen above

Learn more about this topic:

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Operating Cash Flow: Definition & Examples

from Finance 101: Principles of Finance

Chapter 10 / Lesson 4
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