If COGS is increased by 100, Assuming a tax rate of 40%. Net Income decreses by 60.
Decrease in Net Income reduces retained earning by 100.
How will this increase impact cash flow and Balance sheet.
Increase in COGS will decrease inventory.
Will it increase accounts payable.
While calculating operating cash flow, do I need to take into account changes in inventory, payable and net income)
Further how will Asset liability equation match
Hi ankit1987, Before we dive into the detail - please could you explain why a Reduction in NI of 60 causes a reduction of 100 in retained earnings? To my mind the change in RE should reflect the change in NI.
DTL / cash taxes paid up by 40?
Hi Itsonlikedonkeykong - is this a response to my question above. Sorry if I missing something. Thanks
reduction of 100 in RE causes only 60 reduction in NI because of reduction in taxes paid by 40.
mb im wrong.
actually RE should reflects NI.
The inventories here would be different, and the asset side would have been 100 higher before the quarter and the sales took place, so something on the liabilities side would have been 100 higher in order for A = L + SE to be equal.
The simplest way to assume what happened is that the company spent $100 more in cash and has 100 more in inventory that was sold over the quarter so that you don’t need to adjust liabilities or SE in any way. Assuming that the same volume of inventory was sold at the same prices over the period in both instances the only difference here is a decrease of the gross margin, so after removing SG&A you have a lower pre-tax income, lower net income, smaller addition to cash (or acct receivable or whatever asset accounts are associated with sales) and smaller Retained Earnings account on the SE side. Liabilities would remain unchanged with the assumptions I’ve just made