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Date Posted: 12:12:39 09/08/02 Sun
Author: Dr. D.
Subject: Re: Inflow/Outflow chart
In reply to: Jerry 's message, "Inflow/Outflow chart" on 22:31:56 09/07/02 Sat


I think your confusion stems from missing a simple point – Assets are on the Left Hand Side (LHS) of the balance sheet,, but the Right Hand Side (RHS) consists of claims against those assets. So, the RHS lays out the ways that you financed the LHS.

For example – assume that you bought inventory/supplies on credit. There would be no NET change in cash. However, the purchase of inventory would show up as an increase in the inventory account. In other words, an Increase in the LHS accounts. Therefore, and OUTFLOW on the Statement of Cash flows (in the operating CF section).

However, the Accts Payables account would also increase, which would show up as an INFLOW on the operating section. The Accts payables represents money that was "borrowed" from the company that sold you the supplies (i.e. they extended you financing). While the two net out to no change in cash, you still would like to see each one separately.

Likewise, if LTD increased, that wold indicate that you BORROWED funds. Therefore, an INFLOW of cash.

Remember - you first have to determine whether the account is on the Right Hand Side of the Balance Sheet (i.e. an asset) or on the Left Hand Side (a liability or equity account). Then determine whether it increased or decreased. Then determine whether it’s an operating, investing, or financing activity.

Hope this helps.


>I am trying to use the inflow and outflow chart, but I
>don't know how to use it. I already plug few accounts
>on it, but I am not sure if I am doing right.
>So, I get this results: an increase on inventory = an
>outlow (I understand that). But, an increase on A/P =
>an inflow (I dont understand this because the company
>has to pay for this A/P, so it looks to me that should
>be an outflow). Also, the same scenario with LTD.
>Can you explain me how the chart works?
>Thanks

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