# am i correct to include increase inventory to CFO direct method calculation

Hi, i have a question from qbank which i do not understand: Financial information for Jefferson Corp. for the year ended December 31st, was as follows: Sales: \$3,000,000 Purchases: \$1,800,000 Inventory at Beginning: \$500,000 Inventory at Ending: \$800,000 Accounts Receivable at Beginning: \$300,000 Accounts Receivable at Ending: \$200,000 Other Operating Expenses Paid: \$400,000 Based upon this data and using the direct method, what was Jefferson Corp.’s cash flow from operations (CFO) for the year ended December 31st? A) \$1,200,000. B) \$800,000. C) \$900,000. This is the Answer from Qbank which is C CFO = sales \$3,000,000 – purchases \$1,800,000 – change in accounts receivable (\$200,000 – \$300,000) – other cash operating expenses \$400,000 = \$900,000. My calculation is: \$3,000,000 (Sales) \$1,800,000 (Purchases ) \$800,000 - \$500,000= 300,000 (Increase in inventory which is use of cash) \$200,000 – \$300,000 = -100,000 (Decrease in account receivables which is source of cash) therfore \$3,000,000 - \$1,800,000 - 300,000 (use) + 100,000 (source) = \$1,000,000 My question is why the increase in inventory is not include in the calculation? I thought an increase in assets is consider as use of cash. Thanks:)

Using the direct method: (left out three '000) Step 1: Cash collected from customers Sales \$3,000 + Decrease in A/R \$100 Total = 3,100 Step 2: Cash paid to suppliers COGS Increase in Inventory <300> Total = <1,800> Step 3: Cash collected from customers 3,100 - from step 1 Less: Cash paid to suppliers <1,800> - from step 2 Less: Other oper. expenses < 400> - from info in the question CFO = 900 hope this helps a little…

Oh i see. So in direct method, i’m wrong to include purchases into the calculation bcos the purchases is to allow us to find the cogs (end inv = begin inv + purchase - cogs). Am i right at this point? Thanks for the help flo7002. Greatly appreciate the guidance you have given me.

You have to focus in on what is a cash transaction and what is not: They will screw with you by giving different types of info for different accounts. Receivables: Beginning AR + sales - cash recipts = ending AR Here they did not give you the cash received number, but they gave you the other 3 so you solve for it Inventory: Beginning Inv +cash purchases - CGS = ending Inv here they just outright gave you the cash number (the purchases figure) and the rest is just noise .

I just broke it down and used the full formula, but yeah, in this example, they already gave you the cash paid to suppliers (purchases) number. But if you just had different pieces, you’d have to work that number out.