Companies using the accrual accounting method often prepare a statement of cash flows to track the sources and uses of cash. This report uses data from the income statement and balance sheet. Cash flows are the result in changes from account balances for information on these latter two financial statements. Accounts payable affects the operating section of the statement of cash flows.
The statement of cash flows lists all operating activities first on the report. The specific information included here are cash receipts from revenues, including interest and dividend revenue. Cash payments made for expenses represent outflows, including payments made for interest on loans. Accounts payable falls in this section because it may have periodic cash payments made against it.
An increase in accounts payable indicates positive cash flow. The reason for this comes from the accounting nature of accounts payable. When a company purchases goods on account, it does not immediately expend cash. Therefore, accountants see this as an increase to cash. Accountants typically list an increase in accounts payable on a single line for the statement of cash flows.
Companies need to calculate the increase of decrease in accounts payable prior to including it on the statement of cash flows. The basic calculation is subtracting ending accounts payable from beginning accounts payable for the period. A positive figure represents an increase while a negative number indicates a decrease in the balance.
A decrease in accounts payable will also represent a decrease in a company’s statement of cash flows. Companies may list a decrease and an increase in accounts payable on the statement of cash flows. The reason for this is because accountants want to define individual transactions on this financial statement. For example, an increase may occur in general accounts payable while a decrease occurs in accounts payable for inventory.