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Basic Question 4 of 11

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
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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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I used your notes and passed ... highly recommended!
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Lauren

Learning Outcome Statements

describe the steps in the preparation of direct and indirect cash flow statements, including how cash flows can be computed using income statement and balance sheet data

CFA® 2025 Level I Curriculum, Volume 2, Module 4.