This question actually comes up from the M&I guide (Q16 pg 82) but I need some further explanation
Question: you sell 10$ of inventory for 20$ revenue - how does this flow through?
Answer:
IS: NI goes up by 6
CF: +6 from NI, and then +10 from decrease in 10$ in inventory = +16
BS: inventory goes down by 10, Cash goes up by 16$, net change in assets = 6
retained earnings goes up by 6, so A = L + E
Yes that all makes sense and I can get there, but what confuses me is how cash goes up by 16. How did we increase cash by 16 when we sold 10$ of merchandise for 20$. Intuitively / conceptually, this doesn't make sense (seems like a cash gain of 6 to me).
Just curious what the conceptual explanation is. Thanks
the inventory is already paid for (in a different transaction) so the reduction in $10 of inventory doesn't reduce your 20 (or 16 post-tax)
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