DFS - Cashflow - Adjusting for operating activities

System

I am having difficulty in understanding the adjustments that are required for increases & decreases in trade receivables, payables, inventories, accruals and prepayments. Can anyone try and explain what exactly the adjustments are showing/reflecting in the statement. If there is an increase in inventories then this is showing as being deducted, I can understand that if you are not selling the inventories then you are not receiving the cash, and similarily with receivables, but it's confusing me with the payables and accruals and prepayments. I'd rather try and understand the adjustments rather than trying to memorise them and just thinking if one does one thing the other must be the opposite. I feel the need to understand!!

System

Re:DFS - Cashflow - Adjusting for operating activities

Adjustments for accruals and prepayments are done because the cash flow statement is essentially the statement that shows how cash has been used from the beginning of the year to the end.

As you know the financial statements contain various items within them that are "non cash" items e.g. accruals and prepayments and depreciation are non-cash items. The cashflow statement has to have these sort of entries removed as you are essentially reconciling to the increase or decrease in cash during the year. Accruals/prepayments/depreciation and such like do not pass through the bank or cash account.

Similarly with increases in trade receivables, payables and stocks. Increases in trade receivables mean that we have had less money in from debtors than the previous year (thus less money in the bank)hence this has to be deducted. Increases in trade payables mean we have paid out less money this year (i.e. more money in the bank) than we did last year, hence this is added. An increase in stock means we have paid out more money for stock which hasn't been turned into cash, hence this is also added.

What you are trying to do is establish how much physical cash has been generated from the company's normal operating activities i.e. trading on a cash basis, rather than an accruals basis.

Good luck.

kind regards
Steve