Good morning, In the solutions to this question it states that noncash elements in the projected accounts should be allowed for, fiving the example of the need to add back depreciation to provisions. Can you explain how this relates to trade payables and/or receivables please? Thank you
The key to the short term planning process is the estimation or forecasting of cash. Any accounts or management accounts that are used, would have "non cash" items in them to forecast expected profits. Depreciation is an example of these, where management accounts would deduct the depreciation of all the assets the company has. But for cashflow forecasting, it is not necessary to deduct such things as depreciation, as it isnt a cashflow. Another example would be an impairment charge on an asset, or a revaluation profits, or amortisation of an intangible asset. These affect profits, but not cash. So management accounts would be adjusted for these to make them more suitable for cashflow forecasting. After adjusting for these you would have a cashflow analysis, which is mainly trade receivables expected to be paid in, and trade payables expected to be paid out in the period, along with other financial or investing items.
