QUESTION 7

Bay City uses the purchases method to account for supplies. At the beginning of the year the city had no supplies on hand. During the year the city purchased $600,000 of supplies for use by activities accounted for in the general fund. The city used $400,000 of those supplies during the year. Assuming that the city maintains its books and records in a manner that facilitates the preparation of its fund financial statements, at fiscal year-end the appropriate account balances related to supplies expenditures and supplies inventory would be

1. Expenditures $600,000; Supplies inventory $200,000.
2. Expenditures $600,000; Supplies inventory $0.
3. Expenditures $400,000; Supplies inventory $200,000.
4. Expenditures $400,000; Supplies inventory $0.