Accruals Ratio financing

ayaz_mahmud369

Accruals are NOT Financing ones.

What comprises CFF?
Share purchases
Debt issuance
Dividend paid
Debt retirement

All of these are fairly non-accrual based.

Accruals come in due to CFO and CFI. How - see below:

But if you look at CFO -> you have Working capital changes
Accounts receivable - provision for doubtful accounts muck up the deal - in the sense that could be manipulated to provide different results. Also credit terms + close linkage to unearned revenue cause the necessity to look at year-on-year changes in AR. Revenue is accounted for in your Net Income.

Inventory: Inventory obsolescence thro' an account may cause year-on-year changes in the account - which may all not be in COGS (accounted for in your Net Income)
+ classificaion.

AP - changes in payables terms cause changes in your AP balances, which may overstate / understate your COGS/expenses.

CFI - what goes in there? Capital Expenditure. If this is only PP&E - it is good.
But company could choose to capitalize expenses - which would increase CFI.

So if you took your Net income figure and removed your CFO and CFI - what you are left with is the total impact of accruals on net income.

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on a side note - same is being done on your balance sheet accruals as well.
NOA = (Total assets - Cash) - (total Liabs - Debt)

so you are looking at change in NOA - between periods - which means you are picking up the impact of Accruals in total Assets and total Liabs.

CP

former

Why is the formula for accruals:

Net Income - CFO - CFI?

are the accruals considered financing i.e. CFF?

kickthatcfa

well done cpk.

tobeornottobe

Gazhoo, the formula is: NI - (CFO + CFI).......you had cfo - cfi in your original post

Houjichasan

To keep a straight head on this use it like NI - (CFO + CFI)...otherwise, you might mess up on the signs.

Swanand

simple way to think of it...accruals are not captured in CFO and CFI but may be in reflected in net income. So to "flush" them out use the formula

NI - (CFO + CFI)