Suppose the 2014 income statement for McDonald’s Corporation shows cost of goods

Question

Suppose the 2014 income statement for McDonald’s Corporation shows cost of goods sold $5,135.0 million and operating expenses (including depreciation expense of $1,150.2 million) $10,691.1 million. The comparative balance sheet for the year shows that inventory decreased $6.0 million, prepaid expenses increased $43.2 million, accounts payable (merchandise suppliers) increased $18.7 million, and accrued expenses payable increased $216.6 million.

Using the direct method, compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

Explanation / Answer

Cash Payment to suppliers (see working) $5,110.3 Cash payment for operating expenses 9367.5 Cost of Good Sold $5,135 Operating Expenses (10691.1-1150.2) 9540.9 Inventory decreased 6 Prepaid expenses increased 43.2 Accounts Payable increased 18.7 Accured expenses increased 216.6 Now payment to suppliers will be affected by COGS, inventory,Accounts payable payment for operating expenses will be affected by prepaid expenses and accured expenses Increase means closing is more than opening Decrease means closing is less than opening that means it is paid Cash payment to supplier= Cost of Good Sold+Increase in Inventory+Decrease in accounts payable-Increase in Accounts Payable-Decrease in Inventory 5135-6-216.6 $5,110.30 Operating Expenses+Increase prepaid- Increase in accured expenses payable 9540.9+43.2-216.6 9367.5

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