Question

The statement of cash flows for Baldwin Company shows what happens in the Cash account during the year. It can be seen as a summary of the sources and uses of cash (sources of cash are added, uses of cash are subtracted). Please answer which of the following is true if Baldwin's account payable goes down:

Answer 1

If Baldwin Company's accounts payable goes down, it means that the company has reduced its outstanding obligations to suppliers or vendors for goods or services received on credit.

In the statement of cash flows, changes in accounts payable are categorized as an adjustment to operating activities. When accounts payable decreases, it is considered a use of cash because the company is using cash to pay off its outstanding liabilities.

Therefore, if Baldwin's accounts payable goes down, it would be subtracted from the "sources of cash" section in the statement of cash flows. This means that the reduction in accounts payable would have a negative impact on the company's cash flow from operating activities. It indicates that the company has used cash to settle its outstanding obligations, reducing its liabilities but decreasing its available cash.

In summary, if Baldwin's accounts payable goes down, it would be reflected as a use of cash in the statement of cash flows and would decrease the cash flow from operating activities.