How does an increase in Accounts Payable affect FCF
I'm pretty dumb, but I think that if you receive something like legal services, but haven't paid cash for it yet, AP increases, and you record it as an expense on your IS.
$100 increase in AP causes ($100) Pre Tax Income, so like ($60) Net Income. Add $100 from the increase in AP to ($60) on the CFS, so cash is up $40.
Yeah, that makes sense and works how everyone says it does: an increase in AP causes an increase in FCF. But if instead of an expense it's something like inventory, wouldn't there be no effect?
$100 increase in AP for a $100 incrase in Inventory. No changes on IS, CFS is net $0 cause the increase in AP increases cash $100, and the increase in Inventory decreases cash by $100, so the only BS changes are Inventory and AP.
Given that, doesn't FCF remain unaffected? I'm definitely misunderstanding some application of AP, but I have no idea.
Inventory is recognized when sold as COGS, since you just purchased it there is no effect on IS and no *net effect on CFO and so FCF doesn’t change
Yeah okay that’s what I thought but everywhere online saying increase in AP increases FCF always. Wack, thanks
It does increase FCF. No change to income statement bc it’s not a Rev or Expense. Cash Flows from Operations up 100. Balance sheet Cash up 100 (Asset) and A/P up 100 (Liability). It affects FCF through change in Net Working Capital. Since Current Liabilities are up, Net Working Capital is down. FCF = EBIT*(1-tax rate) + D&A - change in NWC - Capex. Since NWC is down, subtracting the negative change will result in an increase in FCF.
Brother, Inventory will increase proportionately, NWC will be unchanged, and so will impact on FCF.
Yeah, this is what I'm thinking, but I don't know why everywhere online says that an increase in AP does increase FCF. If most increases in AP are tied to an asset and not an expense like legal fees, then FCF should be unchanged, but pretty much everywhere else says that's not the case, and I'm confused about why.
Most AP increases are tied to operational assets, right? Weird that most places say FCF changes then.
Assuming your tripping over this because your recruiting for SA27 spots. While there is a definitive answer, your seeing different answers because all sources are making different assumptions (diff. reason for AP being created) and this is why attention to detail is so important. Great ur realizing this now. Sounds like you know your shit - now look these up on different sites, and really pay attention to what the question being asked is saying, and I can guarantee you’ll get clarity pretty quickly. Maybe not, but I’m basing this off of my own recruiting prep when I used to get confused over FCF formula & the answer to “does a company purchase the EV or EQV of a company in an M&A transaction?”. Thought it was obv. EV, then built a merger model of a strategic acquisition and got super confused. My advice is to consult chat gpt as you go through prep, and have it explain things like this. But to answer your question: you are right: it won’t change if AP created for purpose of asset purchase, but will be different and more nuanced if for a period cost or uncapitalized expense. Will depend on tax rate and will have to find new NOPAT calc, then add the increase in AP.
Where in the question does it say that AP is accompanied by an increase in inventory? For interview questions they aren't asking you to make assumptions about why AP is increasing. They just want to know what happens.
?? Increase to AP is a source of cash on the cash flow statement, on BS - cash is up and your AP liability is up.
How does your comment have upvotes?
Read the second part, yeah, AP increases cash on CFS, but if that AP increased due to a purchase of inventory, that asset cancels out the increase, leaving cash net $0.
Or at least that's how I think it works, who knows.
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