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104 Corporate Finance BRILLIANT’S

2. Cash paid for Purchase of Inventory: 2. BÝdoÝQ>ar Ho$ nM}g Ho$ {bE H$mo MwH$m`r JB© am{e:
The relationship between cost of goods sold for {H$gr Ad{Y _| ~oMo J`o JwS²>g H$s H$m°ñQ> Ed§ JwS²>g H$s IarXr
a period and the cash payment for the purchase H$s {bE MwH$m`r JB© am{e Bg na {Z^©a H$aVr h¡ {H$ Cg
of goods depends both on the change in
Ad{Y _| BÝdoÝQ>ar Ed§ ^wJVmZ H$s OmZo dmbr am{e _| Š`m
inventory and the change in amount payable
during the period. The relationship may be n[adV©Z hþAmŸ& Bg gå~ÝY H$mo {ZåZ{c{IV Xmo MaUm| _| ì`ŠV
stated in two stages as follows: {H$`m Om gH$Vm h¡:
(a) Net Purchases = Cost of Goods sold + Increase in Inventory or (–) Decrease in Inventory
(b) Cash paid to Creditors = Net Purchases + Decrease in amounts Payable or (–)
Increase in amounts Payable
When the information about the net `{X àíZ _| naMog Ho$ gå~ÝY _| gyMZm Zht Xr
purchases is not available, it must be JB© hmo Vmo Bgo ^wJVmZ Ho$ H¡$cHw$coeZ go nhco {ZYm©[aV
determined before calculating cash paid for
purchases. As it is known, the cost of goods H$a coZm Mm{hEŸ& My±{H$ `h kmV h¡ Bg{bE ~oMo JE JwS²>g
sold has the following equation: H$s H$m°ñQ> H$m {ZåZ{b{IV BŠdoeZ h¡:
Opening Inventory + Purchases – Closing Inventory = Cost of Goods Sold
 Purchases = COGS – Opening Inventory + Closing Inventory
If the information related to opening and `{X àíZ _| AmonqZJ VWm ŠbmoqOJ H«o${S>Q>a go
closing creditor is given then following g§~§{YV BÝ\$m°_}eZ Xr JB© hmo Vmo {ZåZ{c{IV gyÌ H$m
formula can be used: à`moJ ^r {H$`m Om gH$Vm h¡Ÿ:
Cash paid to Creditors = Opening Creditors + Credit Purchases – Closing Creditors
3. Cash payments for Expenses: There may 3. EŠgn|gog Ho$ {bE H¡$e no_|Q²>g: ~¡b|g erQ> _|
be two types of balances in the balance sheet EŠgn|gog go g§~§{YV Xmo àH$ma Ho$ ~¡b|g erQ> hmo gH$Vo h¢:
in relation to expenses:

Prepaid expenses in asset side and AgoQ> gmBS> _| àrnoS> EŠgn|gog Ed§ bm`{~{bQ>rO
outstanding expenses in liability side. Prepaid gmBS> _| AmCQ>ñQ>¢qS>J EŠgn|gogŸ& àrnoS> EŠgn|gog go
expenses represent the expenses paid in Ame` Eogo EŠgn|gog go h¡ {OZH$m ^wJVmZ g_` go nyd©
advance for the benefit of next period. The
prepaid expenses found in the closing balance H$a {X`m J`m h¡Ÿ& AV: EŠgn|gog Ho$ {c`o H¡$e no_|Q> H$s
sheet have to be added to the expenses to arrive JUZm hoVw ŠbmoqOJ ~¡b|g erQ> _| Xem©`r J`r àrnoS>
at payment made for expenses. The opening EŠgn|gog H$s am{e H$mo Omo‹S> {X`m OmVm h¡ Š`m|{H$ BgH$m