I’m overthinking this, but for indirect method we subtract increases in inventory and add decreases in inventory to net income. Does this mean for direct method we add increases in inveotry and subtract decreases in inventory… FSA Reading 34 questions 10 and 11 add increases in inventory and subtract decreases in inventory…are we to assume this is under direct method?
you’re right about the indirect method. but the direct method you’re not starting from net income. I think what you’re looking at is the calculation of payments to suppliers under the direct method. so you’re taking COGS + increase in inventory + decreases in a/p because they are all cash outflows.
both direct and indirect method do not differ in convention with respect to the Working capital items. think of increase in inventory as a Use of cash - hence should be subtracted. decrease of inventory means source of cash - hence should be added. and you will be fine.
Yeah, that makes sense. I was over thinking it…thanks!
I guess you have to read carefully to see if they use direct or indirect to tell if you need to add or subtract.
no… YOU DO NOT. Whether it is direct or indirect final output will be the same. CFO from Direct = CFO From Indirect. Only the CFO calculation methodology differs between the two methods. YOU ARE DEFINITELY OVERTHINKING THIS ONE, buddy If it is a Decrease of Inventory - INFLOW - ADD, If it is an increase in Inventory - OUTFLOW – SUBTRACT. Do one problem - using both direct and indirect methods to get the hang of it.
Yeah, I’ve been looking at this material too long today. In the question it asks How much cash did the company pay to its suppliers? It’s talking about cash flow, not reconciling net income. I think thats what was throwing me off. Reading 34 Question 10 you add increase of invetory of 5 million, not subtract it because they’re asking you for cash flow. I was thinking about exhibit 9 and was getting confused of why I should add and not subtract an increase of inventory. I think I got it now. 