An increase or decrease in accounts payable during a fiscal period has no effect on the net cash provided by operating activities.
An increase or decrease in accounts payable during a fiscal period does indeed have an effect on the net cash provided by operating activities. Accounts payable is an important component of a company's working capital and reflects the amount the company owes to its suppliers for goods or services received but not yet paid for.
An increase in accounts payable means that the company has acquired more goods or services on credit, resulting in an increase in liabilities. This increase in accounts payable is deducted in the operating activities section of the statement of cash flows, which calculates the net cash provided by operating activities.
Conversely, a decrease in accounts payable indicates that the company has made payments to reduce its outstanding obligations. This decrease in accounts payable is added back in the operating activities section of the statement of cash flows, increasing the net cash provided by operating activities.
In summary, changes in accounts payable do impact net cash provided by operating activities as they reflect the company's ability to manage its working capital and cash flow.
To understand why an increase or decrease in accounts payable does not affect the net cash provided by operating activities, you need to consider the relationship between accounts payable and the cash flow statement.
The cash flow statement provides information about the cash inflows and outflows from operating, investing, and financing activities during a specific period. Net cash provided by operating activities is a measure of the cash generated or used by a company's core operations, and it is a key indicator of a company's ability to generate cash from its day-to-day business operations.
Accounts payable, on the other hand, is a liability that represents the amount a company owes to its suppliers or vendors for goods or services purchased on credit. An increase in accounts payable means that a company has received goods or services but has not yet made payment for them.
When it comes to the cash flow statement, changes in accounts payable will be reflected in the "Accounts Payable" line under operating activities. However, this does not directly impact the net cash provided by operating activities.
Here's why:
1. When accounts payable increases: Let's say a company receives goods or services worth $10,000 on credit, which increases accounts payable by $10,000. This entry is recorded as an increase in liabilities on the balance sheet. However, since no cash has been paid out, it does not affect the net cash provided by operating activities.
2. When accounts payable decreases: Conversely, if a company pays off an accounts payable balance of $10,000, the payment reduces the liability on the balance sheet, but it does not impact the net cash provided by operating activities. This is because the payment represents a movement of funds between cash and accounts payable, canceling each other out in terms of net cash provided by operating activities.
In both cases, the net effect on the cash flow statement is zero since these transactions involve movements between the balance sheet and the cash flow statement rather than actual cash inflows or outflows.
It's important to note that while changes in accounts payable do not directly impact the net cash provided by operating activities, they can indirectly affect cash flows through changes in a company's working capital. Working capital is a measure of a company's short-term liquidity and is calculated by subtracting current liabilities (including accounts payable) from current assets. Changes in working capital can impact the net cash provided by operating activities, but this is due to other components such as accounts receivable, inventory, and other operating liabilities and assets.
In summary, an increase or decrease in accounts payable does not affect the net cash provided by operating activities directly, as it involves movements between the balance sheet and the cash flow statement rather than actual cash inflows or outflows.