Changes in current operating assets and liabilities—indirect method

Mohammed Corporation's comparative balance sheet for current assets and liabilities was as follows:

Line Item Description**Dec. 31, 20Y2Dec. 31, 20Y1**Accounts receivable

$20,400

$19,200

Inventory

63,300

64,000

Accounts payable

17,600

16,700

Dividends payable

15,000

16,000

Adjust net income of $73,300 for changes in operating assets and liabilities to arrive at net cash flows from operating activities.
fill in the blank 1 of 1$

To adjust net income to determine net cash flows from operating activities using the indirect method, we need to account for changes in current assets and liabilities:

### Step 1: Changes in Current Assets
1. **Accounts Receivable:**
   - Increase from $19,200 to $20,400 means an increase of $1,200.
   - An increase in accounts receivable means cash was not collected, so we subtract this amount from net income.

2. **Inventory:**
   - Decrease from $64,000 to $63,300 means a decrease of $700.
   - A decrease in inventory implies that less cash was spent on inventory, so we add this amount to net income.

### Step 2: Changes in Current Liabilities
1. **Accounts Payable:**
   - Increase from $16,700 to $17,600 means an increase of $900.
   - An increase in accounts payable indicates that less cash was paid to suppliers, so we add this amount to net income.

2. **Dividends Payable:**
   - Decrease from $16,000 to $15,000 means a decrease of $1,000.
   - A decrease in dividends payable indicates that cash was used to pay dividends, so we subtract this amount from net income.

### Step 3: Adjusting Net Income
Net Income: $73,300  
Adjustments for changes in operating assets and liabilities:
- Subtract increase in accounts receivable: $-1,200$
- Add decrease in inventory: $+700$
- Add increase in accounts payable: $+900$
- Subtract decrease in dividends payable: $-1,000$

### Calculation:
\[
73,300 - 1,200 + 700 + 900 - 1,000 = 72,700
\]

Thus, the net cash flows from operating activities amount to **$72,700**.

Would you like a detailed explanation of any step or have any questions?

### Related Questions
1. How do changes in inventory affect cash flow?
2. Why do increases in accounts receivable decrease cash flow from operations?
3. How would an increase in dividends payable affect net cash flow from operations?
4. What is the significance of using the indirect method for cash flow analysis?
5. How does a change in accounts payable reflect a company's cash management?

**Tip:** When using the indirect method, remember that increases in current assets reduce cash flow, while increases in current liabilities boost cash flow.

Changes in current operating assets and liabilities—indirect method

Mohammed Corporation's comparative balance sheet for current assets and liabilities was as follows:

Line Item Description**Dec. 31, 20Y2Dec. 31, 20Y1**Accounts receivable

$20,400

$19,200

Inventory

63,300

64,000

Accounts payable

17,600

16,700

Dividends payable

15,000

16,000

Adjust net income of $73,300 for changes in operating assets and liabilities to arrive at net cash flows from operating activities.
fill in the blank 1 of 1$

Calculate net cash flow from operating activities for Mohammed Corporation using the indirect method. Learn how to adjust net income for changes in accounts receivable, inventory, accounts payable, and dividends payable to reach a cash flow of $72,700. Suitable for college-level accounting students.

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