Qbank Question Help (Financing of Payables)

CFA Level I FRA
#1

I had the following question in Qbank

Companies that use Financing of Payables usually, initally

A. Decrease Operating Cash Flow (OCF); Increase Financing Cash Flow (FCF)

B. Increase OCF; Decrease FCF

C. Increase OCF; Increase FCF

The correct answer was A however I don’t quite understand the reasoning

I would have thought that Financing of payables which is another company paying your suppliers (Decrease Accounts Payable) for a negotiated sum (Increase Short Term Loan) would result in Operating Cash Flow increasing (due to payment to suppliers decreasing) and Financing Cash Flow decreasing (due to re-payment of the loan).

Could someone please help?

Thanks

#2

They’re assuming that you report the economic substance of the transaction:

  • Borrow a bunch of money – CFF inflow
  • Pay a bunch of money to suppliers – CFO outflow

If you report the form of the transaction – the lender pays your supplier directly – then the effect is:

  • CFF: nothing
  • CFO: nothing