CFA Practice Question

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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

User Comment
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

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.
bundy very simple

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.
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