Question

What will cause the decrease in cash flow of operating activities?

Example : increase/decrease in inventory/Accounts Receivable/ Accounts Payable.

Please give detailed explanation about Inventory/ A/R / A/P?

How to cause it ?

Answer 1

What will cause the decrease in cash flow of operating activities?

• Increase in Inventory
• Increase in Accounts Receivable
• Decrease in accounts payable

	Effect on cash flow of operating activities	Explanation/illustration
Increase in current liabilities	Increase	Accounts payable/accrued liabilities: We begin cash flow from operations with net profit as per income statement. Income statement contains expenses such as purchases. However, if we purchase on credit (and thus accounts payable increases), there is no cash outflow. We have deferred the payment to a later date. So we have to add back this increase in accounts payable.
Decrease in current liabilities	Decrease	Accounts payable/accrued liabilities: When accounts payable decreases, we are paying cash to the creditors.
Increase in current assets	Decrease	Accounts receivable When accounts receivable increases, we are deferring cash receipts from sales to a later date. Therefore, it is deducted from net income to arrive at cash flow from operations Inventory An increase in inventory indicates that more goods purchased than goods sold. Purchase of more inventory results in use of cash implying outflow of cash.
Decrease in current assets	Increase	Accounts receivable We receive cash (inflow) from accounts receivable and consequently, it decreases. Inventory A decrease in inventory indicates that more goods sold than goods purchased. Sale of more inventory results in an inflow of cash.