# Adjustment to Inventory writedown in measuring Cash paid for suppliers

“In converting a statement of cash flows from the indirect to the direct method, which of the following adjustments should be made for a decrease in unearned revenue when calculating cash collected from customers, and for an inventory writedown (when market value is less than cost) when calculating cash payments to suppliers?”

The correct answer was: Subtract a decrease in Unearned Revenue to measure Cash received & Subtract an inventory writedown to COGS in order to calculate Cash paid to suppliers.

• I quite understand the first one but still confused that why we have to subtract the Inventory writedown to reach Cash paid.
• Just imagine to borrow 10\$ to buy 10 tennis balls, which cost 1\$ each. Then you sell 6 balls, get 6\$ (COGS = 6\$) and pay back 3\$. If there isn’t Inv writedown, Cash paid = 6\$ (COGS) + 4\$ (change in Inv) - 7\$ (change in Payable - you paid 3\$ and still owe 7\$) = 3\$. But if there is an Inv writedown, then ending Inv decrease to 2\$, which would inflate your COGS to 8\$ (without any cash flow). The answer tell you to have 8\$ (inflated COGS) subtracted to 2\$ (the writedown amount). However, I put new values into the formula to calculate Cash paid again and things turn out like this: 6\$ (8 minus 2 of COGS) + 2\$ (ending Inv goes from 4 to 2\$) - 7\$ (still owe 7\$ right?) = 1\$ though I paid 3\$ before.