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In cashflow (direct method),
We find cash paid by putting Cost of Sales in Account payable account. Isn’t it wrong? Shouldn’t we put Purchases as opening and closing inventory are given. I have attempted various question and all take Cost of Sales and put it in Account Payable. Only one question in Kaplan, takes Purchases and put in Account Payable to find cash paid.
What is the reason for this misappropriation?It depends on the information given in the question as to whether or not we can identify the actual amount spent on purchases.
Professor, I have done more than 5-6 MTQs and in every question we are given 2 years’ SOFP and 1 year’s SOPL. We have all data required to find Purchases even we do it on Cost of Sales. That is why confused that what is the reason. And I want your suggestion and best move in this situation you would prefer.
Don’t forget that if they are making their own goods then the cost of sales is not just the purchases, it is all the costs of production. We need all payments to suppliers, not just to the suppliers of the materials.
You do it the way I do in the example that I work through in my lectures (which will be the way it is done in the examples you have attempted).
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