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Grainger makes all sales for cash and is preparing its statement of cash flows using the
direct method. Grainger has compiled the following information:
Cash sales $212,500
Cash purchases $4,600
Cash expenses $11,200
Payables at start and at the end of the year $12,300 and $14,300
Credit purchases $123,780
Wages and salaries due at start and at the end of the year $1,500 and $2,300
Wages and salaries expense $34,600
Inventory at start and ay the end of the year $23,000 and $$17,800
What is the cash generated from operations by Grainger?
A $35,520
B $46,320
C $74,920
D $41,120Ans is D. I got the workings, but why is salary due at the start (1500) put in the credit side of the T a/c? Shouldnt it be a DR ? Payables was a CR, i got that.
Salary due is salary owing and is therefore a liability. Liabilities are a credit balance.
Oh, but isnt salary an expense,and hence a DR balance? Or is it because they mentioned ‘Salary due’ and not just salary
It is because they said salary due at the start of the year. So it was an accrual at the start of the year and therefore a credit balance.
HI John! should we here add 5200 (decrease in inventory from 23000 to 17 800)? the answer in the book says we cant,but i dont get why is that.
i’d be happy and grateful to hear back from youHi,
Yes I have the query regarding Inventory. Do we add it? I added it and got the wrong answer.
Thank you for your help!
It is because the are using the direct method and we know the actual cash payments.
It is only when using the indirect method that we adjust the profit figure for the change in inventory.
Have you wacthed my fee lectures on this? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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