I am having some difficulty understanding CFS linkages between the IS and BS.
In the CFA FRA book, page 284; Cash paid to suppliers;
“If inventory increased during the year, then purchases during the year exceeded cost of goods sold, and vice versa.”
Could anyone please explain the above statement?
Beginning Inventory + Purchases - Cost of Good Sold = Ending Inventory.
Start with this equation.
If Purchases > Cost of Goods Sold then Ending Inventory > Beginning Inventory
and therefore the Inventory increased.
Or:
Beginning inventory + Purchases = Goods available for sale = Ending inventory + Cost of goods sold
Thus, if
Ending inventory > Beginning inventory
then
Purchases > Cost of goods sold
and vice-versa.
What helped me wrap my mind around it is to think of it this way:
So say your COGS are $100. This amount can be made up either of something we purchased and sold this year or something we took out of the inventory (for example we could buy $60 worth of goods to resell and then take $40 out of our old inventory, adding up to $100 COGS)
Now we look at the statement that says inventory increased during the year. What this tells me is not only did we not take anything out of our inventory for our $100 COGS (because if we did, inventory would go down), but we actually bough more ($100 worth of goods for COGS and the rest to increase the inventory).
Therefore, the purchases exceeded the cost of goods sold.
Hope this helps!
-Evgeny
Thanks guys, much appreciated, really helpful! 
Just one more quick question if that’s ok:
If Revenue = $23,598 , and the change in A/R from the previous year is equal to $55.
“if accounts receivable increase during the year, revenue on an accruals basis is higher than cash receipts from customers, and vice versa.”
“Thus, A/R increased by $55, so cash received from customers was $23,543.”
Q) I understand the calculation but don’t understand the above statement, i.e. is the $55 the accrued revenue, if so, how can it be larger than the $23,543 cash received from customers?
I’ve been trying to get my head around this but unfortunately not succeeding…
I’m assuming you are referring to “if accounts receivable increase during the year, revenue on an accruals basis is higher than cash receipts from customers, and vice versa".
Lets assume $55 is the increase in accrued revenue (can do decrease also, the results will be the opposite).
Our revenue is $23,598. This revenue is recognized on an accural basis. If the A/R increased by $55 over the period, that means only $23,543 was collected in cash (the remaining $55 is in the A/R). The statement states that if A/R increased (up by $55), revenue on an accurals basis ($23,598) is higher than cash receipts ($23,543).
Does this help?
s2k FTW