why would you subtract a decrease in AP?
I guess u ask about caculating CFO, when there is a decrease in account payable, that means u use cash to pay suppliers, it is a use of cash, that’s y we need to subtract the decrease in AP.
but this is cash paid to suppliers… not CFO a decrease in AP means that the firm paid down some of its payables… which would be a decrease in cash but an increase to the amount they pay their suppliers
I am relatively new to AF, compared to all of you! I have a very good background for Finance. I believe this doubt is not yet solved for you! The last min studies will surely confuse us on concepts even we were thorough on them before. Here is the answer to CFO calculation wrt AP Payments Strictly, any payment is an outflow of cash. Payment for firm 's Operations are outflow of cash. There is no exception to it for AP Payments. Ofcourse, it reduces liability of the firm. Hence, reduce cash and liability in the B/s. Show outflow , means -ve in CF statement. Categorize it to “Operations” because it is payment during normal (regular)course of business. The supplier firm’s CF statment will show "INFLOW for cash " as received from Customer. So it is not an inflow to the “Paying Firm” . OK?
You have the incorrect formula. For cash paid to supplies you subtract an increase in AP because that represents cash that you did not pay but is still due. Your logic is correct.
I didnt mention any formula. It is only logic that i gave. I explained it from CF statement. If you ask to nail down each element of it, say Cash paid to suppliers. Then, to attack it easy in less time, here is the answer. Cash paid reduces AP Balance. Op. Bal AP-cash paid to supppliers +Purchases=Clo. Bal AP. Take the cash paid to the other side of equation Op. Bal AP +Purchases-Clo. Bal AP=cash paid to supppliers. 500+1000-100=1400 500+1000-0=1500 500+0-100=400 500+1000-800=700 So effectively in all cases, You always will only reduce the closing bal of AP, be it an increase or decrease. The only case where you will increase Closing bal of AP, is when you paid in advance to suppliers , like prepaid expenses. where you say in equation - (-closing bal AP) which then, becomes a +. A clo. bal of AP means that all other purchases and opening balances are wiped off by payments and only the net balance in closing is remaining as due. A closing balance of -ve liability, that means an asset, means prepaid liabilities, over and above what was due. Hence, adding back in the formula above, to obtain cash paid to suppliers. Tell me, if it is still unclear.
AP is used to finance operations. If AP decreases, that means there was an outflow of cash in the operations section on the statement of cashflows…this equates to a decrease in CFO…hence subtracting the decrease in AP.
you are talking about two different things here. It is cash paid to supplies not cash inflow to the firm. that is why you subtract an increase in AP.
mgf3306 Wrote: ------------------------------------------------------- > you are talking about two different things here. > It is cash paid to supplies not cash inflow to the > firm. that is why you subtract an increase in AP. Why would you subtract an increase in AP from CFO?..You wouldn’t. There was no cash outflow or inflow in that case, therefore it would not affect the CF of the firm. All that would happen is an offsetting increase in an asset.
no, again, people are confusing what the questions was here. It was about cash paid to suppliers, thus you subtract an increase in AP.
mgf3306 Wrote: ------------------------------------------------------- > no, again, people are confusing what the questions > was here. It was about cash paid to suppliers, > thus you subtract an increase in AP. Subtract an increase in AP from what?
ok now im just straight confused!!! haha where is oz001!!
@babycakes - your question is pretty vague. What are you saying a decrease in AP should be subtracted from? @mgf - i dont think you have a frickin clue
ok lets say your tryin to calc cash paid to suppliers the solution takes COGS + Inventory (which has increased) - AP (which has decreased) I’m wondering why did they subtract AP when it has decreased?
when AP goes down, who does the cash go to? just visualize cash flow problems and they become much much easier. draw a diagram if you have to.
you are all idiots. That is the wrong formula. this is not even worth anyone’s time anymore. COGS + Inventory (which has increased) - ANY INCREASE IN AP
babycakes Wrote: ------------------------------------------------------- > ok lets say your tryin to calc cash paid to > suppliers > > > the solution takes > > > COGS > > + Inventory (which has increased) > > - AP (which has decreased) > > I’m wondering why did they subtract AP when it has > decreased? This is WRONG! It should be + AP (which has decreased) - Whatever source you are using, it is wrong; consult the reading on CFA volume 3 and you will find they clearly state that an increase in AP is subtracted from cash paid to suppliers. To explain to the rest the logic: COGS is the original amount - you want to see how much was paid to suppliers out of this amount. First of all you will need to see if you purchased more that units sold during the year (PAID MORE CASH than represented in COGS) or purchased less than units sold during the year (PAID LESS CASH than represented in COGS). If inventory increases, it means you purchases more. Thus, you need to add to COGS the increase in inventory. Now, your purchases could be paid by cash or by credit. If your account payable decreased, it means you paid more in cash than the amount presented by purchases. This means that extra cash was paid out to suppliers and thus added to your cash paid to suppliers. Hope this clarifies.
seeeeeeee its totally wrong!!! stupid stella!!!
hope this helps…volume 3, reading 34, section 3…(BTW i am using the 2010 material) Cash Paid to Suppliers: COGS Plus: increase in inventory-----------------> or could be minus: decrease in inventory equals purchases from suppliers minus: increase in AP------------------------> or could be plus: decrease in inventory equals cash paid to suppliers This is from the CFA texts. I was thinkin at the beginning of this thread that it was about the cash flow statement (which I would have been correct on i think had I not answered the wrong question for you). So there you go. Now its time to do my own studying.