Page 638 - Accounting Principles (A Business Perspective)

16. Analysis using the statement of cash flows

Increase in accounts receivable (10,000)
Decrease in merchandise inventory 4,000
Decrease in accounts payable (6,000)
Increase in accrued liabilities payable 2,000
Depreciation expense 5,000
Net cash provided by operating activities $5,000
Notice that both the direct and indirect methods result in USD 5,000 net cash provided by operating activities.
You can use the following table to make the adjustments to net income for the changes in current assets and
current liabilities:

For changes in these Make these adjustments
current to convert accrual basis
assets and current net income to cash basis
liabilities: net income:
Add Deduct
Accounts receivable Decrease Increase
Merchandise inventory Decrease Increase
Prepaid expenses Decrease Increase
Accounts payable Increase Decrease
Accrued liabilities payable Increase Decrease
Note that you would handle all changes in current asset accounts in a similar manner. All changes in current

liability accounts require the opposite treatment of the current asset changes. Use this table in making these
adjustments:
For changes in- Add the changes Deduct the changes
to from
net income net income
Current assets Decreases Increases
Current liabilities Increases Decreases
In applying the rules in this table, add a decrease in a current asset to net income, and deduct an increase in a

current asset from net income. For current liabilities, add increases to net income, and deduct decreases from net
income.
Under the indirect method, the amount of cash flows from operating activities is calculated as follows:
Accrual basis net income
+ or - Changes in noncash current asset and current liability accounts
+ Expenses and losses not affecting cash
- Revenues and gains not affecting cash

= Cash flows from operating activities
After analyzing the changes in current accounts for their effect on cash, we examine the noncurrent accounts
and additional data. Remember that a change in a noncurrent account usually comes about because cash is received
or disbursed.
In the Welby example, we must analyze four noncurrent accounts: Retained Earnings, Equipment, Accumulated
Depreciation—Equipment, and Common Stock.
• The analysis of the noncurrent accounts can begin with any of the noncurrent accounts; we begin by
reviewing the Retained Earnings account. Retained Earnings is the account to which net income or loss for the
period was closed. The USD 6,000 increase in this account consists of USD 10,000 of net income less USD

4,000 of dividends paid.
Retained earnings
Beg. Bal. 30,000
Dividends 4,000 Net income 10,000
End bal. 36,000

639