Treating settlements on the statement of cash flows

When settling your receivables and payables, you’re not actually paying any cash (or at least not for the full amount). Thinking about the statement of cash flows now I would say that you’re not supposed to show those transactions there either. 

So how does one come about showing settlements on the statement of cash flows? By using the direct method there really isn’t a question – you only show what you actually received and / or paid and that’s that. However, once you start showing your operating cash flows using the indirect method, that’s where the adjustments come into the equation.

Say your receivables brought forward balance was 15,000 and the carried forward balance is 26,000. Taking it by the simple method, the receivables have increased and as such, you incurred negative cash flow change in the amount of 11,000 (15,000 was paid during the period and 26,000 is unpaid). However, if we were to presume now that you also settled 5,000 of your receivables, this settlement would mean that out of 15,000 only 10,000 was paid in cash and 26,000 is still unpaid. Cash flow from receivables would 16,000 negative (26,000 – 10,000) and not 11,000. The actual cash outflow is 16,000.

Similar treatment would be given to if payables are settled. From the presumed “paid” amount you deduct those that were actually settled.