Cash Flow

CFA Level I
#1

Could someone explain the effects of changes in working capital in CFO calculations? I am confused when deciding whether to add or subtract an Increase/Decrease in A/R, A/P, and Inventory. Thanks in advance. Cheers.

#2

maparam There are multiple chains running on about Cash flow, and its use in the CFO calculations. Simple: Asset : Increase == Use of Cash Decrease == Source of Cash Opposite to the direction of movement of the Asset. Inv, AR Liability: Increase == Source of Cash Decrease == Use of Cash Same as the direction of movement of the liability. AP, Wages Payable, Interest Payable, Deferred Tax Liability HTH CP

#3

Thanks cpk. But could u further elaborate on add/subtract of those use/source of cash in CFO? Thanks… Really in deep water with this change in W/C thing…

#4

use == subtract source == add try it on a problem

#5

maparam, just think about it. Let’s say your current assets increase. For example, your A/R increase. It means that someone owes your more money which means that you have less cash than you could’ve if A/R hadn’t increased. If your current liabilities increase, for example, your A/P. It means that you owe more money to someone and cash outflow is smaller than it would’ve if A/P hadn’t increased. I hope that helps.

#6

To build on what maratikus said above, see my post at the end of this thread, which has some simple numbers to illustrate the point. http://www.analystforum.com/phorums/read.php?11,620856,620970#msg-620970

#7

For the assets I like to use the change of inventory as an example. Think of it like this: If you increase inventory how did that happen? you must have used to purchase inventory. Therefore, has left the firm (use of cash). Therefore is subtracted from CFO. On the flip-side: If you decrease inventory how did that happen? You essentially exchanged the value of inventory with (source of cash). For the purposes of the exam you essentially sold inventory and took in . Therefore, this will result in an increase in cash. For liabilities think of A/P. If you’re A/P goes down how did this happen? You obviously paid down an account using cash. Therefore, cash left the firm (use of ) and is subtracted from the CFO (use of ). Now if A/P goes up how did this happen? You obviously took in funds which will need to be repaid. Therefore, $ came into the firm CFO will go up (source of funds).

#8

Tks TJR. It makes sense now.