DFS - Cash Flows

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:27AM in AAT student discussion
Hi,

Does anyone have an easy way of remembering the increases & decreases in; inventories, trade receiveables & trade payables. I keep getting confused whether they are a positive or negative answer in the cashflow reconciliation.

Thanks

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    I had the same problem but the only way you can really think about it is:

    If it seems like a positive item in normal circumstances then its in brackets because if you have inventories it's tying up cash and if you have debtors its tying up cash so its a bad thing for the cash flow

    Likewise, by having creditors its a good thing for cash flow as you have not paid it yet.

    I hope this helps! Good luck tomorrow.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    I just remember that an increase in assets (inventories and receivables) is a decrease.

    For liabilities (payables) it's the other way around.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    If an asset increases its a negative figure-cash must be flowing outwards if for example you have bought inventories (youve spent more money). Reverse this method if a liabilty increases.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    If an asset increases its a negative figure-cash must be flowing outwards if for example you have bought inventories (youve spent more money). Reverse this method if a liability increases.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    I responded to another thread previously which more or less asked the same thing. Review my answer at:

    http://forums.aat.org.uk/forums/posts/list/15624.page
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    I just try to remember the lay out and that Depreciation is always first followed by(Profit)/loss on sale of fixed assets next. Then the rest just follow their order on the balance sheet.

    Also try and remember that after depreciation the first 3 items are always deducted if an increase/profit and then trade payables is is taken off if a decrease. so;

    Profit from operations
    add back
    depreciation
    (profit)/loss on sale of asset
    (increase)/decrease inventories
    (increase)/decrease trade rec
    increase/(decrease) trade pay

    less
    tax paid
    interest paid

    equals
    net cash from operating activities

    good luck
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    My method of remembering this isn't as in depth as the other responses. I just remember the adjustments in the following order - inventories, receivables and payables and if the first two are increases they are deducted as an 'i' for increase looks like a minus sign on its end!! I then just remember that the last item (payables) is the reverse of the first two items so an increase will be added on. Not sure if this will help but it works for me!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    Increased inventories means money out to pay for them - negative cashflow
    Decreased inventories means less money going out - positive cashflow
    Increased debtors means less money coming in - negative cashflow
    Decreased debtors means more money coming in - positive cashflow
    Increased creditors means less money going out - positive cashflow
    Decreased creditors means more money going out - negative cashflow

    Money going out is negative, money coming in is positve. Don't know if this helps but just follow the money.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    I seem to be having probs getting the profit/loss figure from assets sold/purchased...hmm is it supposed to be logically worked out?
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:DFS - Cash Flows

    The profit/loss on disposal is the difference between NBV of the asset (Cost less accumulated depreciation) and the sale proceeds. If the proceeds are higher its a profit if not it's a loss. The profit/loss is not a cash transaction so has to be removed from the profit figure in the cashflow statement. Profit has to be deducted and losses need to be added as an adjustment in the operating activities section.

    The sale proceeds figure gets added in the investment activities section as it's money coming in
    Purchase of non current assets gets deducted in the investing activities section as its money paid out.

    To find the purchase figure for Non Current Assets:-

    Purchase = Closing Bal + Disposals at NBV + Depreciation Charge for period - Opening Bal

    (Opening and closing balances are at NBV as they're taken from the balance sheet)

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