Thursday, December 3, 2009
ba2 lecture 7: cash flow statement I
Hi hi 1B23, this is Richard here trying to help you regarding 3 Dec ba2 lecture 7:cash flow statement I.I noticed that the whole lecture was alright for most of us except for one part which is the changes in the current assets and current liabilities under the cash flows from operating activities:working capital changes. People start wondering why would increase in a current asset decreases cash and why increase in a current liability increases cash. etc. So I decided to post in 1B23 blogspot to help you guys out.
First of all, you have to memorize the format of a cash flow statement(compulsory). However, you don't have to memorize the changes in working capital. Meaning that you don't have to memorize increase in current assets=cash outflow, increase in current liabilities= cash inflow.I will teach you my method,it's fast and easy.
All you have to do is to think of the fundamental skill that you learned which is the double entry rule.
Example:
Increase in inventory(current asset).You imagine you are purchasing inventory using cash.So the double entry is Debit inventory, Credit cash.
Credit cash= decrease cash due to the fact that cash is debit nature.
So there you go...this explains why an increase in a current asset decreases cash. You don't have to memorize anything at all. Just use my method.
My method is applicable to all the 4 situation(increase/decrease in current asset,increase/decrease in current liabilities).
Another example:
Decrease in current liability. Imagine you are paying cash to your creditor for amount owed. So the double entry is debit creditors, credit cash. Therefore,credit cash means decrease in cash.
This is not important for now as lecture 7 is not tested in our mid sem test but it will definitely be tested in our class test and end of sem test.
That's all.Thanks,I hope my method is able to help you.
10:28 PM By bsg1B23
