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Cash Paid to Suppliers for Inventory

Cash paid for inventory is different from the cost of goods sold that is recorded on the accrual basis financial statements. To reconcile the amount of cost of goods sold reported on the income statement to the cash paid for inventory, it is necessary to perform two calculations. The first part of the calculation determines how much inventory was purchased, and the second part of the calculation determines how much of those purchases were paid for during the current period.

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First, calculate the maximum amount of inventory that was available for sale this period by combining (a) the amount of inventory that was on hand on the last day of the period (ending inventory) and (b) total cost of goods sold recorded this period. If there were no inventory balance at the beginning of the period, then one could reasonably assume that this total was purchased entirely during the current period. Thus, the amount of inventory purchased this period can be determined by subtracting the beginning inventory balance from the total goods (inventory) available for sale.

Second, calculate the maximum amount of cash that could have been paid for inventory this period (total obligation to pay inventory costs) by combining (a) the amount that was due to suppliers on the first day of the period (beginning accounts payable) and (b) total inventory purchases this period, from the first inventory calculation. If there were no outstanding accounts payable balance at the end of the period, then one could reasonably assume that this total was paid in full during this current period. Thus, the amount paid for inventory can be determined by subtracting the ending accounts payable balance from the total obligation to pay inventory costs that could have been paid. The final number of the second calculation is the actual cash paid for inventory.

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Cash Paid for Insurance

Cash paid for insurance is different from the insurance expense that is recorded on the accrual basis financial statements. To reconcile the amount of insurance expense reported on the income statement to the cash paid for insurance premiums, calculate the maximum amount of cash that could have been paid for insurance this period (total insurance premiums expended) by combining (a) the amount of insurance premiums that were prepaid on the last day of the period (ending prepaid insurance) and (b) total insurance expense recorded this period. If there were no prepaid insurance balance at the beginning of the period, then one could reasonably assume that this total was paid entirely during the current period. Thus, the amount paid for insurance this period can be determined by subtracting the beginning prepaid insurance balance from the total insurance premiums that had been recorded as expended.

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(Figure)Use the following excerpts from Huckleberry Company’s financial statements to determine cash paid to suppliers for inventory in 2018.

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(Figure)Use the following excerpts from Jasper Company’s financial statements to determine cash paid to suppliers for inventory in 2018.

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(Figure)Use the following excerpts from Victrolia Company’s financial information to prepare a statement of cash flows (direct method) for the year 2018.

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(Figure)Use the following excerpts from Swansea Company’s financial information to prepare the operating section of the statement of cash flows (direct method) for the year 2018.

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(Figure)Use the following cash transactions relating to Warthoff Company to determine the cash flows from operating, using the direct method.

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Principles of Accounting, Volume 1: Financial Accounting by OSCRiceUniversity is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.