Hi All, If we were to determine Cash Flow from Operations (CFO) for a case when the Wages Payable has decreased say by $100: Should we be adding or subtracting that from NET INCOME? I would have thought there is more cash on hand as we do not have to pay so much wages now and would therefore ADD it to Net Income but Schweser Qbank 2337 has it the other way round. THANKS!
You should be substracting it. If wages payables decreased then that means within the period, you paid off the outstanding wages that were due to employees/consultants. For example, suppose you have $40k in dues to be paid at the beginning of the period on your balance sheet (beginning wages payable). That means you are liable to physically pay (with cash) an outstanding amount of $40k that was earned by employees. Now suppose, that is decreased to $20k (ending wages payable), that results in a decrease of $20k, which means that you actually paid with cash $20k of that liability within the course of the period. Reducing a liability results in cash outflow, just like paying off the debt on a credit card (money you are liable to pay) results in a cash outflow.
Check this thread out, it helped me out so much I printed it out: http://www.analystforum.com/phorums/read.php?11,817104,817323#msg-817323
I always got these things mixed up. But… Wages payable means that you owe wages but haven’t paid them yet. So if it has gone down by $100, that means you paid out cash for wages (in order to meet a payable)… cash has decreased. It’s tempting to think that wages payable down by $100 means that you actually paid less in wages, but that’s not true. If you had actually been paying less in wages, it’s your COGS that would have gone down, not your wages payable.