Question

Shown below in T-account format are the beginning and ending balances ($ in millions) of both inventory and accounts payable. 

 

Required: 

1. Use a T-account analysis to determine the amount of cash paid to suppliers of merchandise during the reporting period if cost of goods sold was $300 million. 

2. Prepare a summary entry that represents the net effect of merchandise purchases during the reporting period.

Answer 1

1.

Determine the amount of cash paid to suppliers:

Calculate the purchase made during the year by preparing an inventory account as shown below or using the following equation:

 

Purchases = (Cost of goods sold) + (Ending Inventory Balance) – (Opening Inventory Balance)

 

Substitute, $300 million for cost of goods sold, $93 for ending inventory balance, and $90 for opening inventory balance.

Purchases = $300 + $93 – 90

                   = $303 million

 

 ($ in millions)

Inventory account

Particulars	Amount	Particulars	Amount
To balance b/d To Purchases To balance b/d.	$90 $303 $393 $93	By cost of goods sold By balance c/d	$300 $93 $393

 

Calculate the cash paid to customers using the following formula or by preparing the accounts payable account as shown below:

Cash Paid to Customers = (Opening Balance of Accounts Payable) + (Purchases) – (Closing Balance of Accounts Payable)

 

Substitute, $14 million for opening balance of accounts payable, $303 for purchases, $16 for closing balance of accounts payable.

 

Cash Paid to Customers = $14 + $303 - $16

                                            = $301 million

 

Accounts payable Account

Particulars	Amount	Particulars	Amount
To Cash paid to customers To Balance c/d.	$301 $16 317	By Balance b/d. By Purchases By balance b/d.	$14 $303 $317 $16

 

2. Prepare summary entry to summarize the above transactions:

Accounts Payable ($ in millions)

Particulars	Debit $	Credit $
Cost of goods sold account	$300
Inventory account ($93-$90)	$3
Accounts payable account ($16-$14)		$2
Cash paid to suppliers account		$301
To record the summary entry of the transactions

1. Cash Paid to Customers = $14 + $303 - $16

                                            = $301 million

 

2. Accounts Payable ($ in millions) is $301