Please refer to volume 3 text pg268. Can someone explain why it is “Plus: Increase in inventory: 707?” Shouldn’t it be Less: increase in inventory? As far as i know if an asset item increases in the balance sheet it has to be substracted in the cash flow statement. Am i right?
indirect method should have - increase in inventory because it’s use of cash
Oops, I was refering to the direct method. I still dont get it
For the Direct Method: Step 1: Sales + Change in AR Since AR is an asset --> Increase in AR between periods needs to be subtracted Step 2: -COGS + Change in AP + Change in Inv. AP is a liability --> So increase in AP ==> Add, Decrease in AP --> Subtract Inv is an Asset --> Increase in Inv --> Subtract, Decrease in Inv --> Add Step 3: Income Tax --> Income Tax Expense + Change in Tax Payable (Increase Add, Decrease Subtract) --> Will be a deduction in total. Interest expense --> from Income statement (will be a deduction in total) Total CFO --> Step 1 + Step 2 (already has a -ve sign) + Step 3 (should have a -ve sign).
Thanks man! That was really helpful. Regards, Ashwin.