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Course: Finance and capital markets > Unit 5
Lesson 2: Three core financial statementsDoing the example with accounts payable growing
Introduction to Accounts Payable. Created by Sal Khan.
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- I'm confused. Some people are saying Accounts Payable isn't positive and others say it is positive (because companies pay the money at a later date). Since it is the money that you owe, shouldn't it be negative?(1 vote)
- accounts payable is a liability.
I don't know what you mean by positive or negative .
Since the AP liability does not require you to pay interest, it is a bit like borrowing money at 0%, which can be viewed as a good thing.
Don't forget that you got something in exchange for the liability you now owe. Presumably you wanted that thing.(1 vote)
- Wouldn't an increase in shareholder's equity bring in cash? Is there a specific reason that is not taken into account in this example?(7 votes)
- Equity is just the difference between assets and liabilities. E = A - L. If equity increases it just means assets increased more than liabilities, or that liabilities fell more than assets. It doesn't tell us anything about a company's cash situation. There are plenty of ways to increase equity without receiving any cash.(28 votes)
- When calculating cash flow from operating activities, do we include the tax shields provided by depreciation and interest?(3 votes)
- When you create the income statement, depreciation is an expense. It lowers your gross revenue to profit. But no actual cash has been paid for that depreciation. It's an idea that a large purchase cost's can be spread out over the life of that purchase.
Because the cash did not disperse because of depreciation, you add back the depreciation to the income.
Example: Gross revenue: $1,000. Expenses: $300. Deprecation: $100. When you do the income statement, you take your gross revenue minus your expenses and deprecation for your profit. $1,000 - $300 - $100 = $600. This $600 is net income. When you go to your cash flow statement, you start with you beginning cash, say $500, add net income, and add back depreciation. So $500 + $600 + $100 = $1,200 ending cash. Now let's think about it. You started with $500, had gross revenue of $1,000, and spent cash of $300. That's $500 + $1,000 - $300 = $1,200. The depreciation was not a cash expense, so it's not in that second equation.(7 votes)
- can we transfer the excess of cash to reserve in an monthly cash flow(3 votes)
- Yes. The Cash Flow Statement must show ALL cash activities during the period which is shown in three main categories, Cash from (used for) operating activities, investing activities, and financing activities. To keep things simple, Sal has been demonstrating only operating cash activities. Generally, cash transferred to a reserve during the period would be categorized on the Cash Flow Statement as an Investing Activity.(7 votes)
- I still dont understand how accounts payable increase is a source of cash/(3 votes)
- Accounts payable are not really a source of cash. Instead, they allow a business to postpone the payment of a part of the cost of goods sold. In the case of the example in this video, the business was able to pay 100$ in month 2 for the goods and have an account payable of 100$ (essentially a debt) instead of paying 200$. So, for month 2, the business saved 100$, but it will still need to pay that 100$ in the next month. In short, accounts payable are a way to split or postpone an expense, not a source of cash.(4 votes)
- then what is the difference between deferred revenue and accounts payable? don't you owe some one money in both cases?(1 vote)
- Accounts payable is money you owe to someone else. For example, if you buy something with a credit card, what you owe is your accounts payable. Deferred revenue is simply revenue that you are deferring until you complete the job. For example. if you promise to mow someone's lawn , and they pay you $100 before you do it, then you are deferring that revenue until you complete that job.(5 votes)
- So starting at around1:30, do some businesses just carry debt indefinitely? In other words, do they find no incentive to pay off their Accounts Payable to $0, constantly owing one business or another? If so, how is that sustainable??(2 votes)
- It is sustainable as long as people are willing to lend to them. Most businesses carry debt indefinitely, but that is more for leveraging. It is sustainable because the business itself is still making a profit which it can use to pay interest.(2 votes)
- If accounts payable is the amount you owe in the future for things you have acquired now, how is it called when you pay for something now that you will only receive in the future? How would you go about including that in the income, blalance sheet and cash flow statements?(2 votes)
- If I were to do a cash flow statement for one month instead of the whole year:What would be my beginning net income? Would it be the ytd for the year or just the net income for the prior month? Would all my adjustments to get to the bottom cash be the activity just for the month?(2 votes)
- Yes. You do a cash flow statement over a period of time. Starting cash at beginning of month to ending cash at end of month, or starting cash at beginning of year to ending cash at end of year. This will pair with the income statement also done for that period, or the time from beginning to end.(1 vote)
- Do companies have statements for all their assets (like stocks and equipment plus cash) and liabilities (like debt and lost revenue) ? And if they do what are they called?(1 vote)
- The balance sheet has a generalization of all the general accounts at a particular time. The other statement is called the ledger, which would contain specific details on the accounts over a period of time.(2 votes)
Video transcript
In the last series of
examples, we go into month two with $100 in cash. And the way we set
up the example, we spend $200 in month two. And what we've been doing
so far is we're saying, oh, that gets us to a cash
balance of negative $100 at the end of month two. And that's a little unrealistic. I kept it simple
here, and I allowed us to have a negative cash
balance just for simplicity. But usually you will not
see a negative cash balance. The fact that you have
a negative cash balance and you're allowed to
operate, it essentially means that someone
is lending you money. So to make this example a
little bit more realistic, let's imagine a situation. So in month two,
you only have $100. The person that you're
catering for-- that you're buying these $200 of
supply for-- they're not going to pay you
until next month. So you tell the people that
you need to buy stuff from, look, I only have $100. I have this customer. I'm doing the catering
for them this month. Can I pay $100 to
you this month, and then maybe pay another
$100 to you next month? And let's say that
they agree to that. So in month two,
on a cash basis, instead of spending
$200, you're actually spending-- I'll
just write over it-- you're actually spending $100. And then in month three,
you'll also spend $100. Now, this will change your
cash accounting numbers. This will now be negative 100
and this would now be $500. But the more
important thing is, I want to show you how
this could be accounted for in accounts payables. The fact that you essentially
told your vendors, even though you gave
me $200 worth of stuff, I'm only going to
give you $100 now, and I'm going to give
you $100 later-- that means that you've increased
your accounts payable by $100. You've increased this
liability that you owe things to other people. So let me add accounts
payables over here. So I will add it-- I'll add
it in a row-- I'll do it on both of these diagrams-- So
I'll just call it accounts-- I'll just do A period,
so I don't have to write the whole
thing-- accounts payable. And going into the
period, you didn't have any accounts payable. And then now that
you're essentially borrowing $100
from your vendors-- you're allowing to push
back when you pay them-- You now have an accounts
payable of $100. And I'm not going
to work through it on all of this stuff over here. But let's see how that would
have affected the income statement and the
balance sheets. So over here, all
of a sudden, you had another liability--
accounts payable is a liability-- You
have an accounts payable liability of $100. So at this point, we had no
accounts payable liability. And then after the
end of the month, we have an accounts
payable liability of $100. We owe $100 to our vendors,
and our cash is now at 0. So notice it still does
not change our equity. We essentially
added $100 to cash, and then we added
a $100 liability. They cancel out. If you take now this part
right here, all of the assets are 400. 400 400 minus 100
in liabilities still gets you to 300 in equity. But now the reconciliation is to
go from $100 in cash to 0 cash. We're not allowing
ourselves to go negative. And the reason why we can
do that is we actually have a source of cash. So let me erase
that, and then let's add a line right
down-- Let me see if I can add a line
right over here. So we could say accounts
payable increase, and now this is
a source of cash. And it might not be obvious. We're increasing a liability. But it's a source
of cash because we don't have to use our own cash. By increasing the
accounts payable, it's allowing us to not
use all of our cash. So we have an accounts
payable increase of 100. So this is a source of cash. So now the cash
from operations-- 200 net income,
minus 400 plus 100. This whole thing is now minus
100 cash from operations. So you start with
$100, you use 100. Our ending cash is now
0, and it all works out.