Summary
Changes in Accounts Payable (AP) directly impact a company’s cash flow by reflecting the timing difference between receiving goods/services or incurring expenses and paying cash for them. AP is a component of Net Working Capital (NWC).
Impact of Changes:
- Increase in AP:
- Meaning: The company received goods/services but paid out less cash than the value received or expenses incurred during the period. It has delayed payment to suppliers, using their credit.
- Cash Flow Effect: Represents a source of cash. The company retains cash it would otherwise have paid out.
- Cash Flow Statement Treatment: An increase in AP is added back to Net Income in the Cash from Operations (CFO) section.
- Decrease in AP:
- Meaning: The company paid out more cash than the value of goods/services received or expenses incurred during the period (paying off obligations from previous periods).
- Cash Flow Effect: Represents a use of cash.
- Cash Flow Statement Treatment: A decrease in AP is subtracted from Net Income in the Cash from Operations (CFO) section.
See also: Accounts Payable, Net Working Capital (NWC), Cash Flow Statement, Expenses