Question

How does increase in current liability indicate inflow of cash

Answer 1

Dear Student,

An increase in current liability let's say creditors indicates that the company has made some purchases for which payment is not yet done. Now, we all know that these credit purchases (along with the cash purchases) must have been debited to the income statement and therefore led to a decline in net profits of the company. However, while preparing a cash flow statement we are only concerned with cash inflows and cash outflows. So, the expenses for which payment has not been made (causing an increase in current liability) must be added in the cash flow statement.