doubt on accruals

Can someone explain why the formula for accruals is NOA(end) - NOA(beginning)?? If a company is fully financed using equity and has no liabilities, the formula would give us the following:

change in accounts receivable + change in inventory + change in fixed assets… clearly, inventory and fixed assets are not always accrued…

So, am I missing something here??

I’ll try to explain. Remember from L1 how the BS, IS and CF statements are integrated? For example:

Cash received by clients = Revenue - change Accounts receivable + change Unearned revenue

Cash paid to suppliers = COGS + change Inventory - change Accounts payable

Cash paid for other operating expenses = Other operating expenses + change Prepaid expenses - change Other accured liabilities


So basically if you put all these changes in operating assets and liablities on the one side, on the other you will have:

NI - actual cash received / paid for operating and investing activities.

So this change in NOA is the part of net income which is not supported by cash. As we know this part is mean-reverting i.e. if your profit is not supported by cash most likely it will decline in future.

I hope that helps.

Terrific explanantion man!! Finally got it, thanks a lot!! :slight_smile: :slight_smile:

Glad to help :).

PS: I’m a woman.