An investment dealer's corporate finance team is evaluating a retail firm for a potential debt underwriting. They use the indirect method to review the firm's Operating Activities. They note that while Net Income is flat, Operating Cash Flow has surged because Accounts Payable increased significantly. Which of the following best explains why the increase in Accounts Payable improves the firm's operating cash flow?

Question

Accepted Answer

Under the indirect method, an increase in Accounts Payable is treated as a source of cash. It means the firm purchased goods or incurred expenses but has not yet paid cash for them, effectively preserving its current liquidity.

Discussion