Cash Flow Statement - Reconciliation of Profit from Operations

Maria
Maria Registered Posts: 7 New contributor 🐸
in AAT Level 3 (Level 6 in Scotland)
Hi there

Can anyone please help me try to understand this!!!:confused1:

I just cannot seem to grasp when completing a reconciliation of profit from operations for your cash flow statement when and why you actually deduct for example an increase in trade receivables and add a decrease in inventories???

Please help.

Thanks

Maria

Comments

  • definite.studies
    definite.studies Registered Posts: 88 Regular contributor ⭐
    Hi Maria,

    I agree it looks confusing that something which you think about as an increase in an asset like trade receivables should be taken away in this calculation, when calculating profit you would add this towards the profit. The reason is that we are now working backwards from the profit towards the cash flow.

    We know that an increase in trade receivables would have made a positive contribution to the calculated profit, so this reduces the contribution that is required from net cash flow towards the final profit figure. On the other hand, if inventories made a negative contribution to profit then cash flow needs to make a bigger contribution to achieve the final profit.

    Hope this helps. Pete
  • Victoria
    Victoria Registered Posts: 18 New contributor 🐸
    hello,

    the way i used to think of it is what happens to your cash if these things happen. so if you have more creditors then you haven't had to pay them money yet so you have more money so you add it on. however if it was the other way round you would subtract it as you have had to pay more.

    it's just the opposite with debtors.

    and if you have more stock then you haven't sold as much so you have less money so you subtract it.

    it may not be the correct way of thinking it but it works for me!

    hope it helps you too!

    Victoria x

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