Question

Consider the following data for X. Enterprise’s Accounts Payable:

Year	1	2	3
Accounts Payable	78	85	92

Holding all else is constant, how should you adjust X’s year 2 earnings to obtain Cash Flows?
Note: Use a positive number for any additions and a negative number for any subtractions

Accounts receivables:

Year	1	2	3
Accounts receivables	79	57	69

Holding all else is constant, how should you adjust X’s year 2 earnings to obtain Cash Flows?
Note: Use a positive number for any additions and a negative number for any subtractions

Inventory:

Year	1	2	3
Inventory	77	73	67

Holding all else is constant, how should you adjust X’s year 2 earnings to obtain Cash Flows?
Note: Use a positive number for any additions and a negative number for any subtractions

Answer 1

Account payable :

Accounts payable is part of current liabilities and increase in current liabilities implies that cash is coming in and it is increasing while decrease in the same implies cash is decreasing

Since Account payable increase in year 2, we will increase the cash flow by that amount

So increase in cash flow = 85 -78 = +7

Account receivables:

Accounts receivables is part of current assets and increase in current assets implies that cash is going out and it is decreasing while decrease in the same implies cash is increasing

Since Account receivables decrease in year 2, we will increase the cash flow by that amount

So increase in cash flow = 79-57 = +22

Inventory:

Inventory is also part of current assets and increase in current assets implies that cash is going out and it is decreasing while decrease in the same implies cash is increasing

Since Inventory decrease in year 2, we will increase the cash flow by that amount

So increase in cash flow = 77-73 = +4