Question

Discuss one aspect of the Statement of Cash Flows that you found difficult and write a short paragraph to help others learn what you discovered.

Answer 1

Initially, the element of confusion was with deciding whether Increase in current asset or current liabilities or the decrease in them should be added or subtracted.

For example, if there is an increase in accounts receivable I used to get confused whether it should be added or subtracted.

I came up with a solution to this.

Imagine this, if inventory was $ 100 at the beginning of the year. At the end of the year it was $ 120.

This means we PAID OUT for additional inventory. Since it is paid, it means it is an outflow. And an outflow needs to be subtracted.

Similarly if the acccounts payable has increased. It means we did not pay. If we did not pay it means we saed. Saving is an inflow.