Direct Method Cash Flow Statement
Okay, so I get confused on when to add or subtract.
Here's an example:
Balance Sheet
2012 2011
Inventory $ 2000 $ 1600
Accounts Payable $ 5800 $ 4000
Income Statement
COGS $13500
Cash Payments to Suppliers
= COGS + Increase in Inventory - Decrease in AP
= $13500 + $400 - $1800
= $12100
Both Inventory and AP increased from 2011 to 2012. So why is there a "+" for increase in inventory and "-" for decrease in AP?
Is there a Rule for when to add or subtract? I really appreciate it
Thanks Monkeys!
an increase(+) in an asset is a decrease(-) in cash. an increase in a liability(+) is an increase of cash(+). you can think about it like that and vice versa. in the cash payments to suppliers, shouldn't it be COGS - DECREASE in inventory - Decrease in AP? inventory goes from 2000 to 1600
It's a CASH flow statement: Increase in inventory = decrease in cash (if AP hasn't gone up) and decrease in AP = decrease in cash.
http://www.cliffsnotes.com/study_guide/Preparing-the-Statement-Direct-M…
Thanks for your answer, but I am still finding this hard to understand. You mentioned that if Inventory increases, then there is a decrease in cash. So why is it in my example that when Inventory increased, there was no decrease in cash? Why doesn't the same logic apply here for Inventory?
I agree with you that instead of adding 400, we should be subtracting. I don't get it.
Based on this video, the matrix is clear to understand. And so I am still confused as to why Inventory does not follow this logic? I just don't get it.
Just to clarify further:
Think about it for a second.
You would add an increase in inventory as cash paid to suppliers because that means you bought more goods than you sold.
You would add subtract a decrease in accounts payable as cash paid to suppliers because that means you paid off some outstanding bills from previously unpaid purchases.
So just think about what the term you are adding/subtracting really means, and you will have your answer. No need for a rule.
direct method cash flow statement (Originally Posted: 04/05/2012)
Hi Guys,
I've been given a the accounting report for a company prepared in IFRS and have been trying to build an operating model. The issue I've run into is the company prepared its cash flow statement (more specifically, the cash flow from operations section) using the direct method i.e. the first line item is not net income. Correct me if I'm wrong but I assume I will have to build out an indirect cash flow statement to link the financial statements?
Also, are there any general guidelines in reconstructing a cash flow statement? So far, I've taken into account net income, depreciation, changes in net working capital to get the cash flow from operations number but it doesn't match the original cash from from operations number provided using the direct method. Are the non-cash items I'm probably missing going to appear in the I/S or B/S or is it something I need to dig for in the notes?
Thanks guys, tried doing a search for this but nothing turned up.
I'm trying to think logically, but I feel that the Rule is the best way for me to understand -If an Asset goes up, then cash decreases -If an Asset goes down, then cash increases -If a Liability goes up, then cash increases -If a Liability goes down, then cash decreases
I just can't figure this out, as to why Inventory is added? It should be subtracted based on this common rule.
Since you are trying to find "cash paid to suppliers", you are looking for cash decreases.
Inventory increased, so an asset went. By the rules, cash decreased. "Cash paid to suppliers" increased and was the reason your cash decreased.
EDIT: Made an error in my first post. You add a decrease in AP; that subtract shouldn't be there.
BTW, i'm trying to reconstruct the historical AND build out the forecast Cheers.
Could be some nonrecurring gains/losses you haven't adjusted net income for.
Also, is there a reason you have to reconcile the historical SCF?
I guess just to make sure I'm projecting the future cash flow from operations correctly, in general do you not reconcile the historical SCF?
I guess just to make sure I'm projecting the future cash flow from operations correctly, in general do you not reconcile the historical SCF?
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