Cash Flow Statement A/R indirect method issue

bugs
1

I am using desktop version 25.7.18.2519 for software evaluation purposes. If I can resolve my issues, I will convert to the online version.

There is another post I created after encountering this issue, but decided to start this discussion after starting a new company with a few basic entries to replicate the problem.

The problem with one sales invoice has reared its ugly head.

My CGS from the sale transaction is reducing my A/R on the Cash Flow Statement. This is incorrect as inventory reductions (via CGS) should reduce the Inventory on hand instead of A/R.

Here is CFS:
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Yet my balance sheet has A/R as $70.

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The income statement has a CGS of $40.21

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Balance Sheet A/R $70
CFS A/R $55.45
Difference $14.55

$14.55 is the CGS from my single sales invoice.

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For some reason I can’t find, other than thinking this is a bug in the software, my inventory reduction is being taken from the CFS A/R rather than inventory.

The other CGS on the income statement is from cash sales recorded via “receipts”.

2

Creating multiple topics on the same matter is not a good forum practice. You could add your next point on the same thread.

3

It is the same topic but I created a new business and recreated the issue. Adding screen shots of the new business on the old thread would be very confusing. I think this is much easier to understand.

Do you know the cause of the issue?

I could also delete all my posts on the other thread. Should I do that?

4

The CFS is showing the change in AR over the period nominated. It is not the balance of AR as stated in the BS.

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1 Like
5

When beginning AR is zero then the change in AR for the CFS is the same as the ending AR on the balance sheet.

6

Clicking on the details for the AR CFS:

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Inventory changes should never be a part of the AR line.

7

It is not possible for anyone to help you when you do not describe the whole timeline and only provide partial snips

1 Like
8

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New company with no prior balances.

There was one sales invoice for $70. The total sales was $70 and the AR remains outstanding.

This results in an AR balance sheet balance of $70.

The AR amount on CFS should be -$70.

The AR on the CFS is as I posted above. It includes the AR which is offset by the inventory reduction i.e., CGS.

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Here is the sales invoice

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That is the entire picture. One sale, resulting in uncollected AR. But the CFS statement has the CGS offsetting the AR balance.

9

What happens when you do your reports on a Cash Basis?
There is no cash flow on creating invoices.

10

I agree on a cash basis the sales invoice doesn’t create cash flow. However an invoice sales on credit (AR) does create net income. The CFS starts with net income then the outstanding AR balance is offset against the income.

For this new company:
beginning AR = 0
ending AR = 70
So the CFS should have an AR adjustment of -70 to arrive at a zero cash flow from that sale.

The software reduces the AR adjustment for the inventory that was sold. The inventory adjustment should be made on the Inventory on hand line of the Changes in working capital not on the AR line.

See how both the sale and the CGS of the sale are on the AR line of the CFS

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11

This does not seem possible as the P&L Statement shows sales of $190. Were the other $120 in sales via Receipt?

The COGS for the $70 invoice is $14.55 so nett sales (profit) is $55.45 which is the amount of AR that is included in the Net Profit figure so reconciling back to cash position only requires a deduction of $55.45 in the CFS

12

The other sales are cash sales on “Receipts” so they have no effect to the AR.

The CFS changes in working capital should say
AR -70
Inventory -463.50

Both the AR and the inventory are off by the $14.55

Inventory change is not part of the change in working capital of AR.

The change in AR is beginning of Zero less the increase of 70 = -70

The change is inventory was from Zero to 463.50 = -463.50 on the CFS.

13

I presume that you are not questioning the bottom line of the CFS report, but are saying that the report should show the changes to AR and Inventory on Hand at the exact amount of the change that has occurred in these items.

I would agree that your argument has merit and perhaps we should ask the developer @lubos to answer this.

14

Agreed, the changes in AR and inventory should appear on the CFS. If the beginning of both accounts are zero then the change is the ending balance.

I graduated with an accounting degree in 1981 but don’t think basic accounting has changed since then.

I am a retired Texas CPA, but remember clearly that is how we prepared a CFS back in my professional days.

15

Currently when using cash flow statement - indirect method, Manager will put all invoice transactions into Accounts receivable account. Cash flow statement doesn’t look inside what the invoice is for to make more detailed split.

Ideally, Inventory - cost should show cost of goods sold from unpaid invoices. Inventory - sales should show inventory sales from unpaid invoices etc.

I have a plan how to make it work like that in near future.

16

I am confused. Sales Invoice reflect sales (an increase in AR) and also computes a CGS (reduction of AR and inventory). A CGS is a decrease in inventory, and should impact the Cash Flow Statement (CFS) as a decrease in inventory. A decrease in inventory is not an increase or decrease in AR for a change in working capital on the CFS.

CGS is a change in inventory on the CFS.

Company has no opening account balances and has only acquired inventory via capital contributions by owner.

Sales invoice
AR 70.00
Sale 70.00
CGS 14.55
Inventory 14.55

Cash receipt from customer
Bank acct 70.00
AR 70.00

AR
Beginning balance 0
Sales 70.00
cash collection -70.00
ending balance 0

Inventory
Beginning balance 0
Cap contributions of inventory by owner 487.06
CGS -14.55
ending inventory 472.51

CFS change in inventory
AR 0
Inventory 472.51

The Manage.io CFS report has change of working capital of
AR 14.55
Inventory 487.06

The inventory increased for the capital contributions, but the CGS was not reflected as a decrease in inventory. Conversely, the AR increased for the sale but it was not decreased fully by the cash collection of 70.

So both numbers are incorrect on the CFS by the CGS amount.

“Currently when using cash flow statement - indirect method, Manager will put all invoice transactions into Accounts receivable account. Cash flow statement doesn’t look inside what the invoice is for to make more detailed split.”

I can see in the results that this is what is happening, but why isn’t a change in inventory (CGS) being reflected as a change in working capital of inventory?

Please help me understand
“Ideally, Inventory - cost should show cost of goods sold from unpaid invoices. Inventory - sales should show inventory sales from unpaid invoices etc.”

I don’t understand why there would be 2 CGS accounts based on whether the sales invoice is collected. A sale is a sale, if the AR proves uncollectible that is not a CGS issue.

What is the benefit of having different CGS sold accounts. I think I am completely misunderstanding your sentence or intention.

I am quite impressed with the program in general and am not trying to be difficult, however I believe it is not following proper rules of the CFS preparation process.

Is there a way to make entries that impact only the CFS or some way to manually modify the CFS report?

Thanks for your patience with me.

17

There are not 2 COGS accounts - The CFS only reduces profit result for AR invoices that remain unpaid. It excludes the AR invoices that have been paid.

Uncollectible AR invoices are considered as unpaid. If there are uncollectable invoices these would need to be dealt with by bad debt writing off procedures.

18

Unpaid invoice will change your net profit on accrual basis but should have no affect on cash flows from operating activities.

Indirect cash flow statement starts with net profit on accrual basis, that’s why accounts involved in unpaid invoices need to be excluded from that net profit.

No, that would go against the principle of the program that figures between reports must be consistent. The program needs to be improved. It’s not up to the user to “fix” the figures with manual entries to specific report.

Anyway, we both know where is the issue. I’ve put this topic into bugs but it cannot be fixed yet. I need to implement new way for automatic credit allocation on invoices which will make it trivial to fix this bug too.