# 2005 CFA Exam QUestion

CFAI Book 3, Page 294, #13: Cash paid to suppliers is calculated as COGS + increase in inventory - increase in accounts payable I can’t understand this. I thought increase in inventory is decreased, and increase in accounts payable is increased. This is how it is done in Schweser and in practice Q. Could this be a CFAI mistake? It’s not in the errata. The correct answer is one of the choices though , so makes me wonder.

stupid signs… increase in inv is decrease in cash flow (increase in cash paid) increase in payable is opposite schweser puts “-” in front of COGS so everything is reversed i think…confused me at first too

it is correct. An increase in Inventory is an outflow to your supplier. You bought inventory from them, by paying them cash. Similarly COGS is also something that you paid your suppliers. Accounts Payable - if it increases - you bought more from your suppliers on credit and hence owe them. COGS and AP are intuitively -ve items on your Income statement and Balance sheet respectively. If your inventory decreased - you did not purchase as much - so effectively your cash position went up.

I think you are mistaking this with CFO calculation… not cash paid to suppliers.

Your explanation applies to converting cash flows from the indirect method to the direct method. Think about it logically… Your purchases from suppliers would be your COGS and the increase in inventory that you purchased during the year. If you increase AP, that means that you did not pay that money to the suppliers, so you subtract that. Make sense?

jmuc, youre right. the formula i wrote is the one that would be used when converting from indirect to direct. but in the question, it did not ask to convert. it just asked for what cash flow to suppliers would be. so im not sure cfa=no life’s point, although possibly true, applies here.

I think you’re mixing yourself up. the equation for \$ paid to suppliers: COGS + increase in inventory - increase in A/P converting from indirect do direct: subtract increases in inventory, add increases in A/P I’m not real sure how else to try to explain it. increasing inventory implies you purchased from your supplier, so you would have to add this amount.

cfa=no life makes a good point… schewser shows cash as outflow so it reverses the signs of the entire eqn. Cash paid 2 supp= -COGS - Inc in Inv + Inc in AP as opposed to saying Cash paid 2 supp= outflow of cash (COGS + Inc in Inv - Inc in AP ) I had the same confusion and spent significant time on this … although, when I saw it again, it dragged me to the same quick sand… gosh.

I think it just clicked. So let me see if I have this straight. If you start with -COGS, you subtract increases in inventories and add increases in A/P. – This is the method used when calculating CFO, since you are doing cash recived minus cash paid, so the negative sign implicitly goes in front of the COGS. On the other hand, if you start with +COGS (such as a problem where you need to only find cash paid out to suppliers, like the one above), then you add increases in inventories and subtract increases in A/P. – This is the method used when calculating cash flow paid out and is also the method used when converting from indirect to direct CFO. So ngilmore’s comment above, when he said, “I think you are mistaking this with CFO calculation… not cash paid to suppliers” was absolutely right. jmuc was right too.

i assume this is right the n… haha