CFA Practice Question

There are 534 practice questions for this study session.

CFA Practice Question

Pelton Signal Manufacturing, Inc. has the following information from its year-end financial statements, which are prepared under the accrual basis. On the balance sheet, Pelton reports Inventory, Year 1, $10,000; Inventory, Year 2, $8,000; Accounts Payable, Year 1, $2,000; Accounts Payable, Year 2, $6,000. Year 2 Cost of Goods Sold on the income statement is $60,000. How much cash did Pelton pay for inventory purchases in Year 2?

A. $54,000
B. $60,000
C. $66,000
Correct Answer: A

The correct computation is $60,000 accrual basis cost of goods sold minus $2,000 decrease in inventory minus $4,000 increase in accounts payable equals $54,000 cash paid for inventory purchases.

User Contributed Comments 9

User Comment
i020757 60000 + (8000-10000) - (6000-2000) = 54000
gjwhite I agree with io20757: ending inventory = beginning inventory + purchases -cogs, therefore we have: 8k = 10k + purchases - 60k => purchases = 58k But, change in accounts payable is a 4k increase, hence, CASH purchases = 58k -4k = 54k
Lucho P=60-10+8 .........from COGS equation
P=58
Cash flow purchases= 58-4= 54
AlexYuen 58k (outflow) - 4k(inflow) = 54k (outflow)
MMattioli -60000(COGS) + 2000(inventory) + 4000(AP) = -54000
Murrayman The $2,000 in inventory was paid for in cash in a previous period but was nonetheless sold and included on the income statement in the COGS figure for this period. It needs to be removed from the COGS number in order to reconcile to cash paid in the current period.
surjoy BInv + Purchases - COGS = EInv
BAccPay + Purchases - Cash Paid = EAccPay

10000 + Purchases - 60000 = 8000, Purchases = 58000
Sub purchases in Eq 2;
Cash Paid = 2000 - 6000 + 58000 = 54000
wankoo Simple and Good explanation MMattioli.

Cash inflow= +2000(inv.) and +4000(AP)
Cash Outflow= -60000(COGS)

Question: How much cash spent? or what's the cash outflow? -60000+2000+4000= -54000
vatsal92 Follow MMattioli.
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