How to Answer “How does a change in accounts payable affect the cash flow statement?” in Investment Banking Interviews
In investment banking interview prep, a classic accounting prompt is: “How does a change in accounts payable affect the cash flow statement?” It looks simple, but it tests whether you understand working capital mechanics and can explain them cleanly under time pressure.
For this accounts payable cash flow interview question, the core idea is: accounts payable (AP) is a working-capital liability, so changes in AP adjust cash flow from operations—typically through the non-cash/working-capital reconciliation in the operating section.
What Interviewers Look For in IB Technical Interview Questions on AP
This is one of those IB technical interview questions where the interviewer is checking three things at once: (1) whether you know the rule (how AP flows through CFO), (2) whether you know the intuition (why AP is a source/uses of cash), and (3) whether you can connect it to the three statements without getting lost.
They also want to see disciplined cash flow statement analysis: you should specify the direction (increase vs decrease), state the sign in cash flow from operations, and explain what it implies operationally (paying suppliers slower vs faster). Strong candidates add a quick sanity check: “If I delay paying a bill, I keep cash—so CFO goes up.”
Finally, it’s a test of communication. Analyst-level answers are short, directional, and avoid overcomplicating with edge cases—while still acknowledging that the cash flow statement is usually presented using the indirect method and that AP sits within changes in working capital.
Accounts Payable → CFO Framework for Cash Flow Statement Analysis
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Step 1: Define AP and locate it in working capital
Start by stating what AP represents and why it matters for cash: accounts payable is money the company owes suppliers for goods/services already received but not yet paid. Because AP is a current liability tied to operating expenses and inventory purchases, it sits in working capital.
Then anchor it to presentation: under the indirect method, the operating section of the cash flow statement starts with net income and adjusts for (a) non-cash items and (b) changes in working capital. AP is part of that working-capital bridge.
This sets you up to answer directionally and avoids a common trap: talking about AP as if it were financing. AP affects cash, but it’s generally treated as an operating working-capital item (unless you’re explicitly discussing unusual classifications).
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Step 2: Give the directional rule (increase vs decrease) for CFO
State the rule in one line, then explain the intuition:
- If accounts payable increases, cash flow from operations increases (a source of cash), because the company is effectively delaying cash payments to suppliers.
- If accounts payable decreases, cash flow from operations decreases (a use of cash), because the company is paying down supplier balances faster than it is incurring them.
Tie it back to reality: an increase in AP often means the company bought inputs on credit or stretched payment terms, conserving cash in the period. A decrease in AP means cash left the business to settle prior obligations.
If you want to be crisp in interviews, explicitly say “In the operating section, we add increases in AP and subtract decreases in AP.”
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Step 3: Link to the three statements (quick reconciliation)
Show you can do financial statement interview prep-level linkage without turning it into a full walk-through:
- Balance sheet: AP increases or decreases by the period’s change in unpaid supplier invoices.
- Income statement: Expenses may already be recognised (accrual accounting) regardless of when cash is paid.
- Cash flow statement (indirect): Because net income is accrual-based, you adjust to get to cash. If AP goes up, you recognise that some expenses (or inventory-related costs) have not yet been paid in cash—so you add back that cash not spent.
A clean one-sentence reconciliation: “Net income includes costs recognised this period, but if AP rose, not all of those costs were paid in cash, so CFO is higher by the increase in AP.”
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Step 4: Add a tiny numeric example + sanity check
Use numbers to prove you understand the sign conventions and the intuition:
Example: Suppose AP increases by $20 this year. On the cash flow statement, within changes in working capital, you record +20 to CFO (all else equal). Intuition: the company kept $20 of cash by not paying suppliers yet.
Reverse example: If AP decreases by $20, CFO includes –20 (a use of cash) because cash was paid out to reduce what’s owed.
Close with a sanity check that interviewers like: “If I delay paying a bill, my cash balance is higher today—so it must be a cash inflow in the period.”
Analyst-Level Answer for an Accounts Payable Cash Flow Interview Question
An increase in accounts payable increases cash flow from operations, and a decrease in accounts payable decreases cash flow from operations.
Accounts payable is a working-capital liability—money owed to suppliers. Under the indirect method, the cash flow statement starts with net income and then adjusts for changes in working capital to convert accrual earnings into cash. If AP goes up, it means the company recognised expenses or purchased inputs but hasn’t paid the cash yet, so it effectively conserved cash during the period; that’s why the change in AP is a positive adjustment to CFO. If AP goes down, the company is paying suppliers and reducing what it owes, so cash leaves the business and CFO is lower.
For a quick example, if AP increases by $10, you’d typically show +10 in the operating section under changes in working capital. If AP decreases by $10, you’d show –10. The intuition is simple: delaying payment keeps cash in the company, while paying down payables uses cash.
- Lead with the directional rule (increase AP → higher CFO; decrease AP → lower CFO).
- Name the mechanism: indirect method working-capital adjustment.
- Use a small numeric example to lock in the sign.
- Keep it operating-focused (AP is working capital, not debt financing).
Common Working Capital Mistakes in Financial Statement Interview Prep
- Getting the sign wrong (saying an AP increase is a use of cash) instead of using the “delay payment keeps cash” intuition.
- Explaining AP purely as “debt” without stating it’s treated as an operating working-capital item on the cash flow statement.
- Ignoring the accrual-vs-cash bridge and just repeating definitions without linking net income to CFO.
- Overcomplicating with edge cases (classification debates, unusual policies) before stating the standard interview convention.
- Forgetting to specify the section: the impact shows up in **cash flow from operations** under changes in working capital.
Likely Follow-Ups on Accounts Payable Changes and Cash Flow Implications
How is accounts receivable different from accounts payable on the cash flow statement?
Accounts receivable is a working-capital asset: an increase in AR reduces CFO (cash not collected), while an increase in AP increases CFO (cash not paid).
If AP increases, does that increase free cash flow as well?
All else equal, yes—higher CFO flows into higher unlevered free cash flow because working-capital changes are part of the cash conversion.
What could cause AP to increase, and is it always “good”?
AP can rise due to higher purchasing volume or stretched supplier terms; it helps near-term cash, but persistent increases can signal supplier stress or liquidity management.
Where do you see AP on a three-statement model and how do you project it?
AP is on the balance sheet; it’s typically forecast using days payable outstanding (DPO) or as a percent of COGS/purchases, then the change feeds the working-capital line in CFO.
How would AP interact with inventory in working capital?
Inventory build is usually a use of cash, while AP growth can partially fund that build; net working capital impact depends on the combined changes.
How to Practise This in Investment Banking Interview Prep
- Deliver a 20-second core answer for this accounts payable cash flow interview question: “AP up → CFO up; AP down → CFO down,” then add one sentence of intuition.
- Drill a 60–90 second version that includes the indirect method bridge (net income → working capital) and a $10 example.
- Practise with mixed working-capital prompts (AR, inventory, AP) so you can switch signs quickly without hesitation.
- On AceTheRound, rehearse this as a spoken response and aim for: rule → intuition → example → sanity check in under 45 seconds.
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