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, 20Y2	Dec. 31, 20Y1
Accounts receivable	$17,300	$16,100
Inventory	61,100	61,800
Accounts payable	27,100	25,800
Dividends payable	17,000	19,000
Adjust net income of $84,200 for changes in operating assets and liabilities to arrive at net cash flows from operating activities.

To calculate the net cash flows from operating activities using the indirect method, we'll start with Mohammed Corporation's net income of $84,200. Then, we will adjust it based on the changes in current operating assets and liabilities, as indicated in the comparative balance sheet. Here's the process:

### Step 1: Analyze Changes in Operating Assets and Liabilities

1. **Accounts Receivable:** 
   - **Change:** $ 17,300 - 16,100 = 1,200 $ (increase)
   - **Impact:** An increase in accounts receivable reduces cash flows, so we subtract this amount from net income.
   
2. **Inventory:** 
   - **Change:** $ 61,100 - 61,800 = -700 $ (decrease)
   - **Impact:** A decrease in inventory increases cash flows, so we add this amount to net income.
   
3. **Accounts Payable:** 
   - **Change:** $ 27,100 - 25,800 = 1,300 $ (increase)
   - **Impact:** An increase in accounts payable increases cash flows, so we add this amount to net income.

4. **Dividends Payable:** 
   - **Change:** $ 17,000 - 19,000 = -2,000 $ (decrease)
   - **Impact:** A decrease in dividends payable reduces cash flows, so we subtract this amount from net income.

### Step 2: Calculate Adjusted Net Income

Starting with the net income of $84,200, we adjust it based on the changes calculated above:

\[
\text{Adjusted Net Income} = 84,200 - 1,200 + 700 + 1,300 - 2,000
\]

Breaking it down:

1. $ 84,200 - 1,200 = 83,000 $
2. $ 83,000 + 700 = 83,700 $
3. $ 83,700 + 1,300 = 85,000 $
4. $ 85,000 - 2,000 = 83,000 $

### Step 3: Conclusion

The **net cash flows from operating activities** for Mohammed Corporation is **$83,000**.

Would you like further details on any part of this solution? 

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1. How does the indirect method differ from the direct method in cash flow calculations?
2. What impact do changes in inventory have on cash flow adjustments?
3. How are accounts receivable changes interpreted in operating cash flow adjustments?
4. Why are dividends payable considered in operating cash flow adjustments?
5. What types of non-operating changes affect the cash flow statement?

**Tip:** For cash flow analysis, remember that increases in assets usually reduce cash, while increases in liabilities generally increase cash.

Learn to calculate Mohammed Corporation’s net cash flow from operating activities with the indirect method. This example covers analyzing changes in accounts receivable, inventory, accounts payable, and dividends payable, adjusted from a net income of $84,200, showing a result of $83,000.

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