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Suppose a recent income statement for McDonald’s Corporation shows cost of goods sold $4,852.7 million and operating expenses (including depreciation expense of $1,201 million) $10,671.5 million. The comparative balance sheet for the year shows that inventory increased $18.1 million, prepaid expenses increased $56.3 million, accounts payable (merchandise suppliers) increased $136.9 million, and accrued expenses payable increased $160.9 million. Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses

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MrRoyal

Answer:

Cash Payment to Suppliers = $4,715.8 million

Cash payments for operating expenses = $9,309.6 million

Explanation:

Given

Cost of goods = $4,852.7 million

Depreciation expense = $1,201 million

Operating expenses = $10,671.5 million

Increased inventory = $18.1 million

Accrued expenses payable increased = $160.9 million

Accounts Payable (merchandise suppliers) increased = $136.9 million

Calculating cash payment to suppliers.

This is calculated by getting the difference between cost of goods sold and the increment in account payable.

Mathematically,

Cash Payment to Suppliers = Cost of goods sold - Increase in accounts payable

Cash Payment to Suppliers = $4,852.7 million - $136.9 million

Cash Payment to Suppliers = $4,715.8 million ---- Solved

Calculating cash payments for operating expenses

This is calculated by getting the difference between the operating expenses, the depreciation and the increase in accrued expenses payable

Mathematically,

Cash payments for operating expenses = Operating expenses - Depreciation - Increase in accrued expenses payable

Cash payments for operating expenses = $10,671.5 million - $1,201 million - $160.9 million

Cash payments for operating expenses = $9,309.6 million --- Solved

The direct method compute :

(a) Cash payments to suppliers

Given Information:

  • Cost of goods = $4,852.7 million
  • Depreciation expense = $1,201 million
  • Operating expenses = $10,671.5 million
  • Increased inventory = $18.1 million

Accrued expenses payable increased = $160.9 million

Accounts Payable (merchandise suppliers) increased = $136.9 million  

 Formula:

Cash payments to suppliers = Cost of goods sold - Increase in accounts payable

  • Cash Payment to Suppliers = $4,852.7 million - $136.9 million
  • Cash Payment to Suppliers = $4,715.8 million

Thus, the Cash payments to suppliers is $4,715.8 million.

(B)Cash payments for operating expenses

  • Cash payments for operating expenses = Operating expenses - Depreciation - Increase in accrued expenses payable
  • Cash payments for operating expenses = $10,671.5 million - $1,201 million - $160.9 million
  • Cash payments for operating expenses = $9,309.6 million

Thus,the correct answer is $9309.6 million .

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