Increase in accounts payable (a bigger liability) generates cash.
- Suppose the company you're watching has a $45 million increase in cash from accounts payable.
- There is $45 million in cash floating around in the business that didn't show up in net income.
- Let's suppose that one large item was purchased for $45 million. An accounting expense was incurred when the payable was created, but no cash has yet been used to pay the bill. It's still in the bank.
- So while the expense was incurred, reducing earnings, the cash wasn't paid and, at least for now, there's more cash in the business.
Increase in current liabilities provide cash.
Decrease in current liabilities use cash.
How changes in Current Assets affect cash
In different financial statements, it is common to see account receivable, inventories and accounts payables either providing or using cash.
Increases in current assets (other than cash) use cash.
Decreases in current assets (as in a net decrease in inventory) provide cash.
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