- CFA Exams
- CFA Exam: Level I 2021
- Study Session 7. Financial Reporting and Analysis (2)
- Reading 23. Understanding Cash Flow Statements
- Subject 2. Preparing the Cash Flow Statement
CFA Practice Question
There are 534 practice questions for this study session.
CFA Practice Question
If inventory increased by $5,000, accounts payable decreased by $8,000, and the cost of goods sold was $125,000, the cash payment for purchases was ______.
Correct Answer: $138,000
Cash payments of purchases: $125,000 + $5,000 + $8,000 = $138,000
User Contributed Comments 15
|Jmiller74||I think the correct answer is 138,000, that is 125,000+5000 +8000|
|intj||I'm a bit confused here too. I think the site owner should clarify this question.|
|mike_xiao||yes you guys are right. corrected.|
|kalps||This question seems to be incomplete if you ask me, from the info given I do not think you can work out the answer, the answer given seems to be nonsense !!|
|gjwhite||ending inventory = beginning inventory + purchases - cogs we have: change in invent. = ending invent. - beginning invent. = purchases - cogs hence 5000 = purchases - 125k => purchases = 130k but, change in accounts payable = -8k (cash outflow) therefore, CASH purchases = 130k + 8k = 138k|
|eavotri||we're talking about cashflow here. COGS is cash outflow of 125000, increase in inventory (asset)is also use of cash (outflow) of 5000 and decrease in AP (liability) is also use of cash (outflow) of 8000. Thus total cash outflow is the sum = 138000|
|synner||COGS is cash outflow, increase in inventory is also cash outflow, but decrease in AP means we have less deferred cash payments, so there is less cash outflow, which means there is more cash inflow. i think it should be 125k+5k-8k=122k.|
|synner||we paid out $ to purchase inventory,and the increase in inventory 5k + COGS125k=130k. decrease in AP means someone already paid out 8k of it. so total $ paid out = 130k+8k=138k?|
|brimann||This problem is looking at cash inputs for Direct Method of Calculating cash flow.|
|nagri||Cost of Goods sold is not a cash out flow. It is the resultant figure arrived at after adjusting the Opening and closing stocks and purchases for matching the sales affected during that period (matching principle). You have to add to that all other direct costs on accrual basis to arrive at the total COG.
In this problem it is simplified as it is only concerned with inventory.
So, Cost of Goods sold = 125,000
Add: Increase in Inventory = 5,000
This gives the total purchases = 130,000
(DURING THAT PERIOD)
Now this is again not the cash outflow for the purchases. Look at the changes in Accounts Payable which has decreased by 8,000. Let us assume the opening balance as 8,000.
Then Accounts Payable OB = 8,000
Add purchases = 130,000
Less Accounts Payable CB = 0 (decreased)
Total payment made for purchases = 138,000
By the rule also decrease in a/c payable is an outflow.
COGS + increase In Inventory + decrease in Accts Pay = Cash paid to suppliers
|moneyguy||exactly, bundy. That's it. Moving on to the next one. We should keep these as simple as possible, so we have more time to work out the more complicated ones on test day.|
|2014||Simple way, u have a store
U sold 1,25,000 (COGS)
your inventory increased by 5,000. So, total purchases = 125,000 (already sold) + 5,000 (available more) = 130,000
Now Your accounts payable decreased by 8,000. This means that you paid 8,000 in addition to 130,000 (From the begining of year the year your accounts payable decreased by 8,000. So This means u paid this year total accounts payable 130,000 + 8,000) = 138,000
If increase in accounts payable by 8,000, means 122,000 cash payments
|lynserious||i think the cash payment for purchase here refers to cash paid to supplier.|
|UcheSam||Total cash paid to supplier 138,000 but cash paid for current purchase is 122,000.|