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Hello Sir….
Why in the Indirect Method For preparing Statement of Cash Flows Under Operating Activities Section In which we arrive at Net Cash Operating Profit by Adjusting Operating Profit In SOPL We Adjusted For Inventories???? I mean to say inventories were already accounted for in Cost of Sales(OI+ Purchases-CI) when arriving at operating profit then why did we re-accounted for them in cash flows order to record any inflow or outflow of cash due their increase or decrease during year????The cost of sales itself is not a cash flow. The cash flow is the cash paid for the purchases. Accounting for the increase or decrease in the inventories is ‘adjusting’ the cost of sales figure that was used in the calculation of the profit to get the cash flow.
It still isn’t clear to me Sir….. Increase or decrease of inventory was already accounted for in Cost of sales by Adding Opening Inventory then adding Purchases then subtracting closing Inventory then why Redo it again in Cash Flows Profit adjustment When its already adjusted?????
Also increase or decrease in inventory whether in Cost of sales or Cash flows doesn’t reflect Cash Inflow or out flow, its payables or Receivables Which reflect Outflow or inflow.
Not at all.
Suppose the opening inventory is 10,000, the purchases are 50,000, and the closing inventory is 20,000. The sales are 60,000. And suppose all sales and purchases are for cash, so no receivables and no payables.
The cost of sales is 10,000 + 50,000 – 20,000 = $40,000.
The profit is 60,000 – 40,000 = $20,000However this is not the net cash flow. The only cash flows are the sales of 60,000 and the purchases of 50,000 and so the operating cash flow is 60,000 – 50,000 = $10,000
Therefore on the Statement of Cash flows we take the profit of 20,000 and adjust for the increase in inventory of 10,000. $20,000 – $10,000 = $10,000.
(I assume that you watched the free lectures working through this chapter? Using the notes without watching the lectures is not enough – they are only lectures notes, not a study text – and is a waste of time because it is in the lectures that I work through the examples and explain and expand on the notes 🙂 )
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