Accounts Payable Increases by $10: Three Statements Interview

"Accounts payable increases by $10" tests whether you know unpaid supplier bills are a cash source today. Pair it with inventory and AR drills so working capital signs stay automatic. Interviewers like it because it looks simple and still separates memorized addbacks from real linkage.

The short answer

"If we booked $10 of expense on account at a 20% tax rate, net income falls by $8. On the cash flow statement, the AP increase is a working capital source of $10, so cash is up $2. The balance sheet shows cash +2, AP +10, and equity -8. Cash does not fall until we pay later."

If inventory was purchased on account and nothing was sold yet, switch to the inventory-plus-AP case where earnings and cash stay flat.

Lock assumptions

State the fact pattern before linking statements. Two clean versions show up constantly:

1. Expense already on the P&L (services consumed; AP up)
2. Inventory purchased on account (AP up and inventory up; NI unchanged)

Interviewers usually mean version 1 unless they mention inventory. Ask one clarifying sentence if the setup is ambiguous. Also lock tax (often 20% or 40%) and keep it consistent across IS, CFS, and BS plugs.

Base walkthrough (expense on credit, 20% tax)

You recognized $10 of operating expense and recorded AP. No cash left the company yet.

NI -8
CFO = -8 + 10 = +2
Cash +2; AP +10; Equity -8

The firm got a tax shield on an expense it has not paid in cash. That is why cash rises while earnings fall. If someone says cash is -8 or -10, they forgot the tax shield, the AP source, or both.

Inventory + AP together (no P&L yet)

If inventory +10 and AP +10 with nothing sold:

• Income statement unchanged
• Cash flow NWC: inventory use (-10) and AP source (+10) net to about 0
• Balance sheet: Inventory +10, AP +10

Cash is flat. Do not force a net income hit just because AP moved. Inventory remains an asset until sold or written down. Sale and write-down are separate drills.

AP vs accruals vs deferred revenue

AP and accrued expense often share the same three-statement shape when the cost is already on the P&L. Deferred revenue differs because cash arrived early and revenue is still delayed.

When you pay later

Later, AP -10 and cash -10, with no new P&L if the expense was already booked. The AP decrease is a working capital use. Equity does not move again for that settlement. If you pay and expense something new at the same time, unpack both events.

Working capital sign fluency

Memorize the operating capital signs:

• AR up: use of cash
• Inventory up: use of cash
• AP up: source of cash
• Accrued liabilities up: source of cash
• Deferred revenue up: source of cash

AP up is supplier financing. Growing firms can fund part of operations with AP days. Shrinking firms that pay down AP can burn cash even if EBITDA looks fine. That bridge matters in LBOs and linking questions.

Common traps

1. Cutting cash by $10 when AP rises
2. Forgetting tax on the expense case
3. Putting the AP change outside CFO
4. Mixing inventory-on-account with expense-on-account
5. Calling AP a D&A-style non-cash addback instead of a WC source

30-second verbal (expense case)

"At 20% tax, booking 10 of expense on account lowers net income by 8. Cash flow adds the payable increase of 10, so cash is up 2. AP is up 10 and equity is down 8. If we later pay, cash and AP both fall by 10 with no new P&L."

Follow-ups you should expect

Linked ladder

1. Inventory +10
2. This page (AP +10)
3. AR +10
4. Accrued expense +10
5. Inventory write-down

Practice on SheetRank

Three-statement cases reward clean plugs more than fancy vocabulary. If you can narrate AP cold, you will also model NWC in an LBO without inventing cash.