Accounts receivables impact on FCFF/FCFE

Dronaldo's picture
Rank: Senior Chimp | 21

Accounts receivables increase by $100 (tax 40%)
How will it impact on FCFF/FCFE?
Will it decrease by 100? Or by 40?
My thought: in case of increasing AR we recognize revenue in IS,
So revenue is up by 100, Net income is up by 60
In CFS we substract AR, so CFO is down by 40 -> FCFF/FCFE down by 40?
Am I wrong?

Comments (15)

Feb 1, 2017

Trade A/R is working capital. It seems intuitive that assigning new A/R would not decrease FCFF, unless there is a reason to downgrade the asset (i.e contra accouts). But I could be wrong.

Feb 2, 2017

You are right. EBIT(1-T) is up by 60.
Change in NWC is up by 100.
FCFF is down by 40 (60-100). FCFE is also down by 40 as A/R and revenue recognition have no impact on financing of the company.

Feb 2, 2017

CFA lvl 2 curriculum says that both CF go down by 100. If Accounts payables increase by 100 then it states that both CF increase by 100. Is it a mistake in curriculum?

Feb 2, 2017

The question in the thread referred to accounts receivables, not to accounts payables. Changes in A/P is a different thing.
In your case just look on the components.
A/P has gone up by 100. (which means you did not pay someone 100). Change in NWC is -100.
Any other changes? No. No revenues are recognised, that is no impact on EBIT. No aditional capex and no changes in depreciation.

FCFF = EBIT(1-T) + D - change in NWC - CAPEX.

---> change in FCFF is +100.

Changes in A/P do not affect financing, therefore change in the FCFE is also +100.

CFA lvl 2 curriculum is right.

But once again, it is not what was asked in the thread.

Apr 26, 2020