Ireland Beginner here, Working capital from BS v. working capital from CFS


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Hi all,

To exercise my speed in calculating CF items from BS I have been trying with FS of companies that I have available. With this particular company, consistently over time, the change in debtors reported in the CF is different from the difference in current liabilities reported on the BS.

As an example, one year the difference calculated on the BS was +32 (hence adding cash) but in the CF it was reported at -42 (subtracting cash). Why is this?

Even after trying to play around with the broken down figures in the creditors, I cannot find that -42 anywhere.

Thanks
 
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Werner Reisacher

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I assume that "debtors" are accounts receivable.
If you take "Net Income" as the starting point to calculate cash generated from operations, and the account receivable position increases, it means, that not all the cash generated from sales has actually been received yet. You kind of granted a short term loan to receivables. Consequently, your cash generated from operations needs to be decreased to correct the "Net Income" opening position. If the accounts receivable balances decrease, you add the decrease as an additional cash inflow to the cash generated by the sales during that year.
You may want to check whether the bad debt allowance plays a role in the difference you are looking for.
When I run into problems as you describe, I usually do a manual check by crossing off lines be lines in the two balance sheets and the corresponding net difference in the Cash Flow Statement. If both Balance Sheet balance, you are bound to find the problem maker.
Below is a URL. You may want to look at the difference in the presentation format of CFS (direct/indirect methods) - just in case.
 
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I assume that "debtors" are accounts receivable.
If you take "Net Income" as the starting point to calculate cash generated from operations, and the account receivable position increases, it means, that not all the cash generated from sales has actually been received yet. You kind of granted a short term loan to receivables. Consequently, your cash generated from operations needs to be decreased to correct the "Net Income" opening position. If the accounts receivable balances decrease, you add the decrease as an additional cash inflow to the cash generated by the sales during that year.
You may want to check whether the bad debt allowance plays a role in the difference you are looking for.
When I run into problems as you describe, I usually do a manual check by crossing off lines be lines in the two balance sheets and the corresponding net difference in the Cash Flow Statement. If both Balance Sheet balance, you are bound to find the problem maker.
Below is a URL. You may want to look at the difference in the presentation format of CFS (direct/indirect methods) - just in case.
Thanks for your reply.

Rather than debtors, it should read creditors, hence accounts payable. My apologies.
Is it possible that the change in WC from the CFO differs from the one calculated from the BS?
 
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Werner Reisacher

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Anything is possible. You need to go back to the original Balance Sheet to exclude such a possibility. Error areas are usually around Net Income/depreciation/Fixed Assets and those items that are the difference between more than present/past year balances of one single Balance Sheet line item.
 

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