A record store buys all of its inventory on credit. During 2005, the store's inventory account increased by $10,000. Which of the following statements must be true for Planet Music during 2005?

A. It made payments of less than $10,000 to suppliers
B. It paid less cash to suppliers than it recorded as cost of goods sold.
C. It made cash payments of $10,000 to suppliers
D. It made more cash payments to its suppliers than it recorded as cost of goods sold

I thought it was C but I'm not sure if my logic is right. I assumed that since the store bought inventory on credit, they would have to repay back through cash during 2005.

I'm not so sure I like the wording of this question, but I'd pick C also - again, same reason you state.

Not sure though.. we don't know if the company paid cash or not...

Does anyone understand the question?

Yep, I'm with you guys that the question isn't tight enough... leaves too much room for ".. well, it depends... ".

Still, let's assume that the company eventually pays all of its payables. If so, then the total payments to vendors is equal to the total purchases of inventory.

Knowing that the inventory balance increased by 10K over the year tells us that the company bought 10K more than it sold. It might've bought 100K and sold 90K, or bought 260K and sold 250K... etc. Whatever the specific numbers were, we just know they bought 10K more than they sold for the year.

And if the amount they bought = total payments to suppliers (per our assumption above), then..

basically you are saying that they bought more than they sold, and since the amt they bought = total payments, the total payments is more than they sold.

Therefore the answer would have to be D?

Yeah, that's how I see it. But I don't like that we have to supply an assumption to get there (that the company's payments to its vendors at least closely approximated its total purchases, for the year in question).

Still, the assumptions we'd have to make for A, B, or C to be true are pretty far out there, whereas the assumption to make D work is reasonable.

I'm unable to be quite as "nice" about this question as the others have been. The person who wrote it needs to be shot and quartered.

ArcSine is correct that the only "reasonable" assumption that can be applied is that ALL of the payables is paid off. But in reality, not only could we never know that, but it's also highly unlikely to happen that way. The problem is just trying to make you think - and since that's really the only assumption you could make, that's about all you can really go with. Which would be fine if the problem would add the simple statement that the same amount of the payables got paid off. What would be so hard about adding that? Or even just have the entire amount paid in cash instead - that would enable you to concentrate on the point of the question instead of fighting with it. In fact, the question is just flat out incorrect by trying to state what MUST be true. No, it mustn't.

Curious where this question came from. People can get pretty stupid when they write these and I just don't see the sense in causing this type of aggravation. I tutor for a living and it's amazing how much time gets wasted over something silly like this (or why the software won't accept a correct answer), instead of spending the time actually learning the material.

(I have no opinions on the topic, really I don't. :p)

This was a question that I just got wrong on Exam 2 of the Harvard Business School online Acct I and Acct II course that's meets my MBA prereq requirement...

Answer: It made more cash payments to its suppliers than it recorded as cost of goods sold.
Sure.

The answer is: It made more cash payments to its suppliers than it recorded as cost of goods sold.
For sure! I got it right!