06 March 2011
Hi friends, While preparing cash flow statement we calculate working capital changes.In that calcualtion 1)Increase in debtors,we will consider as decrease in cash? and 2)Increase in creditors we will consider as increase in cash? can any one explain me increase in debtors and creditors is a non cash transaction,but why will consider it?
Please explain me with an example how those transactions make increase/decrease in cash?
06 March 2011
in the case of credit purchases decrease in the creditors from one year to another year will result in decrease of cash from operations because more cash payments have been made to the creditors which will result in outflow of cash. On the other hand, increase in creditors from one period to another will result in increase ofcash from operations as less amount has been paid to the creditors which result in increase of cash balance in the business. The effect of cash purchases in computing cash from operations can be calculated as follows: Cash from operations= Net profit+Increase in Creditors or --- Decrease in Creditors
In the same way you can get the concept of debtors too. This is how transactions make increase/decrease in cash.
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