the increase in inventory, increase in AR/AP i got from balance sheet dont match with the numbers on the company's cash flow statement?? what are the reasons? and which one should I use (im trying to use the indirect method to get the cash flow.
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it seems like your're working on a modeling test. just PM me the model and i can help you out
Historicals won't work that way - I asked my professor in undergrad the same thing yrs ago and he told me it was something to do with adjustments, etc. - it's complicated. Don't sweat it. Just make sure the future numbers work.
frgna is correct - you will rarely be able to reconcile historical numbers on the cash flow statement to the balance sheet. Don't even try.
even the ending balance?? the ending balance I got doesnt match the one on the balance sheet..
If I am not mistaken, the changes in Account Receivable on the Balance sheet also include changes in allowance for doubtful account and bad debt expense and thus won't match the Cash Flow statement unless you adjust for those changes as well.
Please, someone correct me if I'm wrong on this (I am not near my intermediate textbook to check at the moment and thus this is off the top of my head), but here are two scenarios that should illustrate this.
Scenario one:
The company lives in a utopia and will collect all of its AR, thus there is no need for an allowance account.
2012 Revenue (accrual): 100 2011 Ending Net(and gross) AR: 10 2012 Ending Net(and gross) AR: 7
From this, we calculate cash collections from customers as 100 + 3 = 103 (the decrease in AR means you collected more cash than sales you made).
Scenario two:
This company is in the real world. They realize they will not collect all their AR, thus they set up a an allowance account. Further, due to issues with some of their creditors, they increase their allowance account this period and book bad debt expense.
2012 Revenue (accrual): 100 2011 Ending Net AR: 10 2012 Ending Net AR: 7 2012 Bad Debt Expense: 2
Cash collection from customers is now 100 + 3 - 2 = 101 (this is because the 3 decrease in AR is only partially attributable to collecting cash from customers while the rest of the change is attributable to the increase in your allowance account).
Note I say net AR, this is generally what is in balance sheets released to the public. If you knew the change in gross AR, you would not have account for the change in allowance for doubtful accounts.
Scenario two continued:
2011 Gross AR: 11 ADA: 1 Net AR: 10
2012 Gross AR: 10 ADA: 3 Net AR: 7
Note that the change in gross AR is 1, and that the change in ADA is 2.
TL;DR the balance sheet numbers are net and thus you can't determine the change in accounts purely attributable to changes in cash. Thus, use the statement of cash flow number.
Great detail. Is this also true for change in inventory mismatches between the BS and CF? I'm looking at a company that has a 4x inventory turnover and Chg in Inventory that is 2x larger on the CF than the BS
The CF statement shows actual changes that occurred at the company on an operational level. The balance sheet figure (balance now less the balance in the prior year) accounts for te operational change plus any working capital that might have been acquired/divested, etc. through the likes of M&A.
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