cash paid to suppliers suppliers

w1977

why would you subtract a decrease in AP?

homie

I am relatively new to AF, compared to all of you! I have a very good background for Finance.
I believe this doubt is not yet solved for you!
The last min studies will surely confuse us on concepts even we were thorough on them before.

Here is the answer to CFO calculation wrt AP Payments
Strictly, any payment is an outflow of cash.
Payment for firm 's Operations are outflow of cash.
There is no exception to it for AP Payments.
Ofcourse, it reduces liability of the firm. Hence, reduce cash and liability in the B/s.
Show outflow , means -ve in CF statement. Categorize it to "Operations" because it is payment during normal (regular)course of business.

The supplier firm's CF statment will show "INFLOW for cash " as received from Customer.
So it is not an inflow to the "Paying Firm" . OK?

rkapoor

You have the incorrect formula. For cash paid to supplies you subtract an increase in AP because that represents cash that you did not pay but is still due. Your logic is correct.

ogoluwa

I didnt mention any formula. It is only logic that i gave.
I explained it from CF statement. If you ask to nail down each element of it, say Cash paid to suppliers. Then, to attack it easy in less time, here is the answer.

Cash paid reduces AP Balance.
Op. Bal AP-cash paid to supppliers +Purchases=Clo. Bal AP.
Take the cash paid to the other side of equation
Op. Bal AP +Purchases-Clo. Bal AP=cash paid to supppliers.
500+1000-100=1400
500+1000-0=1500
500+0-100=400

500+1000-800=700
So effectively in all cases, You always will only reduce the closing bal of AP, be it an increase or decrease. The only case where you will increase Closing bal of AP, is when you paid in advance to suppliers , like prepaid expenses. where you say in equation - (-closing bal AP) which then, becomes a +.

A clo. bal of AP means that all other purchases and opening balances are wiped off by payments and only the net balance in closing is remaining as due. A closing balance of -ve liability, that means an asset, means prepaid liabilities, over and above what was due. Hence, adding back in the formula above, to obtain cash paid to suppliers.

Tell me, if it is still unclear.

trogulj

you are talking about two different things here. It is cash paid to supplies not cash inflow to the firm. that is why you subtract an increase in AP.

burnsy562000

mgf3306 Wrote:
-------------------------------------------------------
> you are talking about two different things here.
> It is cash paid to supplies not cash inflow to the
> firm. that is why you subtract an increase in AP.


Why would you subtract an increase in AP from CFO?...You wouldn't. There was no cash outflow or inflow in that case, therefore it would not affect the CF of the firm. All that would happen is an offsetting increase in an asset.

nitoha

no, again, people are confusing what the questions was here. It was about cash paid to suppliers, thus you subtract an increase in AP.

joemoran

ok now im just straight confused!!! haha where is oz001!!

pacmandefense

@babycakes - your question is pretty vague. What are you saying a decrease in AP should be subtracted from?

@mgf - i dont think you have a frickin clue

lc26mizzou

ok lets say your tryin to calc cash paid to suppliers


the solution takes


COGS

+ Inventory (which has increased)

- AP (which has decreased)

I'm wondering why did they subtract AP when it has decreased?