in schweser, it states that LIFO in early years has higher COGS and thus lower taxable income and lower tax outflow which then translate to higher cash flow. but wont the increased COGS be greater than the decreased tax outflow? shouldnt a higher COGS mean a lower cash flow?
Not necessarily; COGS expenses can be accrued, but income taxes paid are always cash outflows.
never mind. i figured it out. cogs and inventory go hand in hand. cjones65: you are mistaken. cogs is always used to compute cfo.
I think that cjones65 is actually correct. COGS doesn’t necessarily equate with cash outflow, especially if it results in an increase in accounts payable. Taxes paid though are due that period. The Gov’t wants their money now, not later, so income taxes are always cash outflows in that respective period.
How do you calculate “Cash Paid to Suppliers” without COGS? According to Page 116 in Schweser: " beginning inventory + purchases - COGS = ending inventory beginning accounts payable + purchases - cash paid to suppliers = ending accounts payable " I don’t know about income statement and balance sheet in your neck of the woods, but I don’t see the item “purchases” on mine. Pleas share your wisdom on how you would calculate “Cash Paid to Suppliers” without “purchases” and “COGS”.
I do not think there is a direct relation between COGS and cash paid to suppliers. only that amount would be paid that is owned to them, COGS might have more cost then actual amount paid to suppliers. Example only raw material is purchased and converted into finish product. COGS will include all the cost incurred and only cost of raw material will be paid to suppliers. When a firm purchases inventories, there are two possibilities. 1. Goods are purchased on cash basis 2. Good are purchase on credit. Accounts follow double entry system, that means for every transaction there will be TWO entries. 1. Goods Purchased on cash Basis: It has two parts cash and inventories. When payment is paid, Cash goes out and an inventory comes in. 2. Goods Purchased on credit, it means good have been purchased (increase inventories) and payment would be made on future date (accounts payable) When cash is paid to suppliers, then cash goes down and accounts payable reduces. Cash flows (inflows and outflows) effects the cash flow statement Purchases, COGS, beginning inventors and ending inventories effect the inventories. What the “Schweser” says is partially correct. Beginning inventory + purchases - COGS = ending inventory Purchases over here mean TOTAL purchases in financial year or in one operating cycle which ever is longer. Beginning accounts payable + purchases - cash paid to suppliers = ending accounts payable Purchases means that goods are purchased on CREDIT. Cash purchases during a year (cash goes out and inventories are increases) + Credit purchases during a year (inventories increase and accounts payable increases) = total purchases during a year (total of cash purchases and credit purchases) will increase inventories. I hope this helps.
let me break this to you. if an income statement and balance sheet is given, how do you calculate cash paid to suppliers without using COGS? also, purchases are normally not stated on those two financial statements. i hope you didnt miss this on your exam 
your logic is full of doo doo.
Before calculating the cash paid to suppliers, you need to have purchases amount. In order to calculate the purchases you need to work with inventories equation. 1. Calculate the purchases amount using the inventories equation. 2. Calculate the changes in accounts receivables. i.e. beginning accounts payable, ending accounts and purchases (for which payment would be made in future) Using equation beginning accounts payable + purchases - cash paid to suppliers = ending accounts payable calculate the CASH PAID TO SUPPLIERS. Refer to pager number: page 268 CFA textbook for details >also, purchases are normally not stated on those two financial statements. >i hope you didnt miss this on your exam Well, I know that purchases are not normally of income statement and balance sheet. Thanks a lot for informing me something that I already know. >your logic is full of doo doo. Doo doo… HUH!! What I said was basics of preparation of T accounts. T accounts are prepared before the financial statements. It helps in better understanding of financial statements if one knows T accounts well. If I said something wrong (which I do not think I did), I am very much open for a discussion. I am ready make a mistake today and learn from it. By the way have you ever studied accounts before?? i hope this time you understand things.
that was my original argument, i said you absolutely need COGS to calculate cash paid to suppliers (when purchases is not given, which is most of the time). but you beg to differ. you and other newbs claimed that theres no direct relationship or COGS is not “necessary” when calculate cash flow. spirit Wrote: ------------------------------------------------------- > I do not think there is a direct relation between COGS and cash paid to suppliers.
you are just rephrasing the two equations that i quoted from schweser, except you typed a gigantic paragraph of crap. why are you lecturing me on t accounts? balance sheets, fyi, are t accounts. spirit Wrote: ------------------------------------------------------- > What I said was basics of preparation of T accounts. T accounts are prepared before the financial statements. It helps in better understanding of financial statements if one knows T accounts well. i dont believe you need to prepare t accounts “before the financial statements”. balance sheets are t accounts. you cant put together a balance sheet in any other way. spirit Wrote: ------------------------------------------------------- > Accounts follow double entry system, that means for every transaction there will be TWO entries. no comment. spirit Wrote: ------------------------------------------------------- > What the “Schweser” says is partially correct. i guess you are the expert here again. partially correct? give schweser a break.
i dont think we are on the same page here or we are not speaking the same language. but ill reiterate myself again. my original question to you is: can one calculate cash paid to suppliers without using cogs? given only the income statement and balance sheet. the answer is no. cogs is directly related to cash paid to suppliers and very necessary to calculate cash paid to suppliers and cash flow.
spirit, i just reread your post. english is probably not your first language. i can understand if you didnt catch my original argument. im sorry if i was too harsh with my comments. spirit Wrote: ------------------------------------------------------- >Cash flows (inflows and outflows) effects the cash flow statement Purchases, COGS, beginning inventors and ending inventories effect the inventories. all financial statements are interconnected; you cant analyze one without the other. in fact, cogs, inventories, and purchases will all affect cash flow statement. spirit Wrote: ------------------------------------------------------- >Cash purchases during a year (cash goes out and inventories are increases) + Credit purchases during a year (inventories increase and accounts payable increases) = total purchases during a year (total of cash purchases and credit purchases) will increase inventories. i can assure you its possible that cash purchases and credit purchases combined in a year will not increase inventory. (cogs = purchase) well, its good that you are having this discussion. its obvious you havent taken the exam yet. you have a lot of work to do. good luck.
„« I can assure you its possible that cash purchases and credit purchases combined in a year will not increase inventory. (Cogs = purchase) Can you prove it? Then go ahead and try. I am just 21; I am very much interested in learning. I would still say that COGS may or may not be equal to purchase. „« I said you absolutely need COGS to calculate cash paid to suppliers (when purchases is not given, which is most of the time). but you beg to differ. you and other newbs claimed that theres no direct relationship or COGS is not “necessary” when calculate cash flow. Even CFA textbook says that one needs purchase amount in order to calculate cash paid to suppliers. COGS is required to calculate purchase amount. PAGE 268 CFA FSA TEXTBOOK „« i dont believe you need to prepare t accounts “before the financial statements”. balance sheets are t accounts. you cant put together a balance sheet in any other way. spirit Wrote: ------------------------------------------------------- > Accounts follow double entry system, that means for every transaction there will be TWO entries. no comment. You have no idea what accountancy is all about. „« i can assure you its possible that cash purchases and credit purchases combined in a year will not increase inventory. (cogs = purchase) Purchases during a year will increase inventories and sales will decrease inventories. I am not a native English speaker, I made many mistakes, I agree, I will not make any excuses, mistakes are mistakes and I sincerely apologies for it. I will try to do a better job next time I write sometime. ‘Schweser’ material is good, but CFA prepares the exam. Try reading their text books if in doubt. Best of luck for the exam and I am sorry if I said something harsh. PS: I have no interest or have any free time to get involved in any war of words, so from next time, I will speak to the point.
MrK150, I think you need to take Accounting 101, COGS is based on accrual and taxes paid are always cash. I did not have time to read all the posts… and i also dont care for reading useless arguments… cogs = beg inv + purchases - end inv Now purchases are not always on cash that why we have accounts payable, and when we calculate cash paid to suppliers under the direct methods, what we are trying do is to calculate the cash paid portion in account payable account. There are other expenses like plant depreciation, accrued wages etc that are non cash in cogs. I think it helps… and I think you need to work a lot of rest of FSA… as it is just the beginging… and for my credentials… I am an accounting major from ASU … and I think I know what I am talking about.
madanalyst: you obviously didnt read the post so i dont know why you are commenting on this. i never argued about the nature of cogs or taxes paid. my statement was that you need cogs to calculate cash flow when purchases amount is not given. others disagreed with me. whats your take on that? madanalyst Wrote: ------------------------------------------------------- > MrK150, I think you need to take Accounting 101, > COGS is based on accrual and taxes paid are always > cash. I did not have time to read all the posts… > and i also dont care for reading useless > arguments… > > cogs = beg inv + purchases - end inv > > Now purchases are not always on cash that why we > have accounts payable, and when we calculate cash > paid to suppliers under the direct methods, what > we are trying do is to calculate the cash paid > portion in account payable account. There are > other expenses like plant depreciation, accrued > wages etc that are non cash in cogs. > > I think it helps… and I think you need to work a > lot of rest of FSA… as it is just the > beginging… and for my credentials… I am an > accounting major from ASU … and I think I know > what I am talking about.
spirit Wrote: ------------------------------------------------------- >Even CFA textbook says that one needs purchase amount in order to calculate cash paid to suppliers. COGS is required to calculate purchase amount. PAGE 268 CFA FSA TEXTBOOK so youve been agreeing with me all along. i said you need cogs to calculate cash paid to supplies when “purchases” amount is not given. thats my mine question to you. and you dont need the “purchases” amount. it doesnt matter if its purchased with cash or credit. it doesnt matter when “purchases” amount is not given. you also claimed spirit Wrote: ------------------------------------------------------- >I do not think there is a direct relation between COGS and cash paid to suppliers.
spirit: if your purchase total is $10,000 this year (it doesnt matter if its purchased with cash or credit), and the cogs on the income statement is also $10,000, then your inventory will not change. i never said cogs and purchase are always equal; i said its possible that even with purchase, inventory level can stay unchanged. that was the context. i was saying with regard to one of your generalized comments. spirit Wrote: ------------------------------------------------------- >Cash purchases during a year (cash goes out and inventories are increases) + Credit purchases during a year (inventories increase and accounts payable increases) = total purchases during a year (total of cash purchases and credit purchases) will increase inventories. let me highlight the misleading part for you. spirit Wrote: ------------------------------------------------------- >total purchases during a year (total of cash purchases and credit purchases) will increase inventories. thats not completely correct in our context. it only stands when cogs is less than purchase. i know any purchase will increase inventory level. but we were talking about cash paid to suppliers. i guess its a bad choice of word. instead of saying, “I can assure you its possible that cash purchases and credit purchases combined in a year will not increase inventory.” i meant unchanged. “I can assure you its possible that cash purchases and credit purchases combined in a year can result in unchanged inventory level.”
madanalyst: my initial statement was cogs expense will decrease cash flow. madanalyst Wrote: ------------------------------------------------------- >when we calculate cash paid to suppliers under the direct methods, what we are trying do is to calculate the cash paid portion in account payable account. sounds fishy. cash paid to suppliers = beginning accounts payable - ending accounts payable + purchases guess what, even with no change in your accounts payable, you can still have cash paid to suppliers with new purchases.
MrK150, sounds like you have a lot of work to go before December.