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Dear Chris
I have question in relation to cash flows from operating activities indirect method. My troubles with cash flow begin when I think how transactions were entered in accounts.
If I buy inventory I have two choices : 1. if I buy for cash I have Inventory Dr Cash Cr
2. If I buy for credit I have Inventory Dr Payables CrFirst transaction involves cash outflow. Second is non monetary transaction.
Let’s say my balance sheet for the end of 2020 shows zero balance on inventory. In 2021 I have two transactions on inventory account. 200 pounds each. The first one is monetary transaction and second one is non monetary transaction. At the end of 2021 I have increase in inventory for 400. Is this important for cash flow that first transaction is monetary transaction and second one is non monetary transaction ? Do you think it is important for cashflow how transactions were entered into accounts ?
Hi,
You are over complicating the scenario. Follow what has been taught in the class notes/videos and you will be fine in answering any exam question.
If you are looking at the way you are above then don’t forget that the credit transaction will also impact the payables balance and so there will be a movement in payables too. This movement alongside that of the inventory movement will then net off to give the correct cash movement.
Thanks
thanks for reply
Yes , credit transaction results in increase on botn inventory and payables account. Can you tell me how those two entries (Debit on Inventory and Credit on Payables ) net off in cash flow ? I have troubles to grasp it.
The change in inventory amount (an increase) would be the same as the change in payable amount (an increase). An increase in inventory we deduct from the profit and the increase in payables is added to profit. The two movements net-off each other.
Thanks
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