Crash Course in Accounting and Financial Statement Analysis, Second Edition

Changes in Accounts Payable

If accounts payable increased from one year to the next, the implication is that a company has bought more goods on credit during the year, therefore conserving its cash; this has a positive cash impact. Conversely, if accounts payable decreased from one year to the next, the implication is that a company had to pay off its outstanding payables, representing cash outflow for the company.

Accounts Payable and the Cash Flow Implications Company ABC has an accounts payable balance of $150m in year-end 2005. In year-end 2006, ABC’s accounts payable decline to a balance of $100m. Assuming no new purchases on credit for now, this means that ABC paid $50m of the $150m it owes to its suppliers. That means that ABC’s cash balance will go down by $50m (remember, since the accounts payable balance declines, that implies that ABC is spending money to pay its suppliers, from whom the company originally purchased its goods or services on credit). This represents cash outflow.