Practice makes perfect. :) Link to the spreadsheet to follow along: docs.google.co... Link to our advanced cash flow webpage for practice problems, quizzes, and more: tlctutoringcom...
Just curious about Office Supplies. I understand they are a current asset and reductions of current assets are treated as a source of cash in cashflow statements. This is clearly so when you consider inventory which brings in cash when a portion is sold (reduced), or receivables which bring in cash when debtors pay (reduced). Therefore in reality, doesn't a reduction in office supplies mean they were consumed resulting in an outflow of money? Please explain the logic behind a reduction of office supplies resulting in an inflow of cash.
I think it's important that we remember that we *start* with net income, which is based on accrual accounting, or in the case of office supplies, we expense when they are used. That means that we are starting our cash flows for office supplies with the office supplies expense for the year (office supplies used). Keep that in the back of your mind as we analyze office supplies... Now, why do office supplies go up and down? Office supplies go up when we buy them and down when we use them. So if office supplies went down, then during the year we used more supplies than what we bought (supplies used > supplies purchased). Now step 3, supplies used versus supplies purchased. Which of those is going to reflect the cash we spent on supplies? Supplies purchased. Now let's bring all three of these concepts together. Net income right now reflects supplies used. We need it to reflect supplies purchased. We know that the supplies used during the year was more than the supplies purchased, so we have to add back the difference to reconcile it back to supplies purchase, which will reflect cash outflows. If your brain hurts... I get it. It's mental gymnastics, and we're combining a lot of core accounting concepts here. If it's a little hard to understand by reading, send me an email and I'll make a video. TLCTutoringCompany@gmail.com
@@accountinghelp 😢🙄😂Thanks. I guess I'll just stick to the "rule" rather than the logic then. But generally, it's when supplies are purchased that results in an actual outflow.
