cash paid to suppliers suppliers

w1977

why would you subtract a decrease in AP?

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.

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?

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.

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

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.

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.