ajpheif16

when AP goes down, who does the cash go to?

just visualize cash flow problems and they become much much easier.

draw a diagram if you have to.

ishfaque

you are all idiots. That is the wrong formula. this is not even worth anyone's time anymore.

COGS

+ Inventory (which has increased)

- ANY INCREASE IN AP

farrukhsadiq

babycakes Wrote:
-------------------------------------------------------
> 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?

This is WRONG! It should be + AP (which has decreased) - Whatever source you are using, it is wrong; consult the reading on CFA volume 3 and you will find they clearly state that an increase in AP is subtracted from cash paid to suppliers.

To explain to the rest the logic: COGS is the original amount - you want to see how much was paid to suppliers out of this amount. First of all you will need to see if you purchased more that units sold during the year (PAID MORE CASH than represented in COGS) or purchased less than units sold during the year (PAID LESS CASH than represented in COGS). If inventory increases, it means you purchases more. Thus, you need to add to COGS the increase in inventory. Now, your purchases could be paid by cash or by credit. If your account payable decreased, it means you paid more in cash than the amount presented by purchases. This means that extra cash was paid out to suppliers and thus added to your cash paid to suppliers.

Hope this clarifies.