Accounting Questions - Inventory and Cash Flow Statement

[investaguy]

Hello,
I'm a techie, not an accounting guy. However, I'm studying accounting and finance on the side for investing purposes and growth. I'm currently reading a very basic book dealing with financial statements. My question is about inventory. The book states if inventory increases then cash has decreased and if inventory decreases cash has increased.

However, wouldn't this depend on whether you actually paid cash or receivedcash for the inventory?

Here's how I see it. Maybe you purchased the inventory on credit? Maybe you sold the inventory on credit increasing account receivable? I both cases, no cash has actually went into or out of the business.

Thanks in advance for any assistance.
John

 

[Rocinante]

Hello,
I'm a techie, not an accounting guy. However, I'm studying accounting and finance on the side for investing purposes and growth. I'm currently reading a very basic book dealing with financial statements. My question is about inventory. The book states if inventory increases then cash has decreased and if inventory decreases cash has increased.

However, wouldn't this depend on whether you actually paid cash or received cash for the inventory?

Here's how I see it. Maybe you purchased the inventory on credit? Maybe you sold the inventory on credit increasing account receivable? I both cases, no cash has actually went into or out of the business.

Thanks in advance for any assistance.
John

Correct. The cash account is not touched until the money actually changes
hands. In the meantime, you would journalize the sales, inventory, cost of
goods sold, a/p, and a/r accounts depending on the transactions. Imagine
what would happen if a bookkeeper for a small company recorded all sales
immediately into the cash (various bank sub-accounts) account and tried to
cut checks to pay bills based on those numbers. I ran into this problem
with a restaurant that immediately recognized credit card sales as cash and
didn't understand why their checks kept bouncing.

In a related matter, if you withdrew $100 from an ATM, would you consider
it an expense or just a transfer of assets until you used the cash?

--
If you can keep your head when all about you are losing theirs, it's just
possible you haven't grasped the situation. -- Jean Kerr

(e-mail address removed)
11/16/2013 10:19:04 AM

 

[John]

Correct. The cash account is not touched until the money actually changes

hands. In the meantime, you would journalize the sales, inventory, cost of

goods sold, a/p, and a/r accounts depending on the transactions. Imagine

what would happen if a bookkeeper for a small company recorded all sales

immediately into the cash (various bank sub-accounts) account and tried to

cut checks to pay bills based on those numbers. I ran into this problem

with a restaurant that immediately recognized credit card sales as cash and

didn't understand why their checks kept bouncing.



In a related matter, if you withdrew $100 from an ATM, would you consider

it an expense or just a transfer of assets until you used the cash?



--

If you can keep your head when all about you are losing theirs, it's just

possible you haven't grasped the situation. -- Jean Kerr



(e-mail address removed)

11/16/2013 10:19:04 AM

Thank you.

On the related matter, I'd consider it a transfer of cash until I used it.

Is that correct thinking?
John

 

[Rocinante]

Thank you.

On the related matter, I'd consider it a transfer of cash until I used it.

Is that correct thinking?
John

Yes, of course. You could have it in your pocket for weeks before you use
it. Personally, I don't keep track of where it specifically goes as I spend
it unless I make a major cash purchase. I have a Misc. Cash account in
Quicken, debit it when I withdraw cash, and count what is left in my wallet
each week and credit the difference.

--
"Attention to Detail: noticing that the clock on one of your systems is
using Aleutian time, and changing all the others to match."
-- Aeleen Frisch, on sysadmin virtues
"Essential System Administration"

(e-mail address removed)
11/22/2013 2:49:26 PM