Why in a consolidated cashflow statement do working capital adjustments under increase in trade and other receivables count as a decrease in the cashflow? The opposite, decrease in trade and other payables counts as an increase?
Is it to do with some sales having been completed and added to the income statement but the cash has not been received etc?
Thanks,
Dear Metier9,
Increase in trade and other receivables counts as a decrease in cash because you are funding the receivable.
To use an example the business takes its cash and buys some stock. Cash down, stock up. This stock is then sold, but the debtor is now still being funded from your original cash. Only when it gets paid does the business get the cash. So any increase in stock or debtors (trade receivables) is essentially something that the business has had to fund, on top of whatever it was funding before.
On the other hand payables, where the business owes the money is someone else effectively providing the working capital.
Hope this helps.
jpsc01
