I’m a little jumbled up regarding my concepts in the cash flow with regard to:
Increase in account receivale should be added or subracted from net income.
increase in in inventory should be added or subtracted
Please clarify the same.
Thanks& Regards
Increase in Accounts Receivable: You have sold products and/or services on credit, i.e. you did not receive any cash at the point of sales recognition. Hence, an increase in accounts receivable is substracted from net income.
Increase in inventory means that you have purchased inventory in excces of COGS. Hence, there has been an cash outflow for the purchases and you substract the increase from net income.
As a shortcut:
An increase on the asset side is always substracted from net income and vice versa.
An increase on the liabilities side is always added to net income and vice versa.
Hope this helps. Oscar
honestly when analyzing the cash flow statement always thinks about current assets and current liabilities and how they report INTO net income
When calcualting cash from operations you want to take out changes to these accounts accounts rec and accounts payable are easy way look at the changes in these account and reverse them
if accts payable increases a lot well it reduced your NI, but how does that really affect the cash operations in this transaction? Well you really didnt pay anybody with cash so you need to now add this increase back into NI…do the reverse with accounts rec a big increase in accounts receivable over a period will reflect in a higher NI, but you really never received cash so you have to take NI and reduce it by the increase
hope this helps
I wrote an article on the indirect method of CFO that may be helpdul here: http://financialexamhelp123.com/cfo-indirect-method/
I always remember in this way:
If its asset side increase, u need to substract from NI, and if asset side decrease, u need to add back to NI.
And the oppposite holds good for liability side…
Therefore, inventory and A/R are assets so increase in them will be deducted from NI.