Statement of Cash Flow Indirect Method Change In Accounts Receivable

In this presentation, we will continue putting together the statement of cash flows using the indirect method focusing here on the change in accounts receivable. The information will be a comparative balance sheet, the income statement and some added information we will be focusing in on a worksheet that was composed from the comparative balance sheet. So here is our worksheet. So our worksheet that we can pay that we made from the comparative balance sheet, current period, prior period change. So we have all of our balances here for the current period, the prior period and the change, we have put in this change. And this is really the column that we are focusing in on we’re trying to get to this change in cash by finding a home for all other changes. Once we find a home for all other changes. We will get to this change in cash the bottom line here 61,900. The major thing we’re looking for is right here. We’ve already taken a look at the change in the retained earnings. And the change in the accumulated depreciation. Now we’re going to look at the changes in current assets and current liabilities.


Now note here that we could, we’re not going line by line like you might think we could go line by line as and go straight down this thing and try to fill out exactly where we want to put these within the statement of cash flows. But what we’re doing here is probably what most people do, we’re kind of starting with the operating activities, then moving to the investing and financing. So we started with net income in the operating activities, which is really the change in retained earnings. And then we went to the activities, the decrease in or the depreciation and pull that out. And then we’re going to move down to the changes in current assets and liabilities. So now we can kind of go through here and we’re kind of going line by line. We started with cash, it’s down here. Now we’re back up to accounts receivable. So it’s listing what’s happening here changes in current assets and current liabilities. Now there’s a couple different ways that you can Think through these, you know, what are we going to do with these? The main problem is, we know what the changes but what do we do over here? What do we do in terms of increases or decreases to our cash flow statement. And that’s a little bit confusing, we can memorize what to do as just like a just to just to memorize what assets do and what liabilities do.



And then we should probably work it out a few times to theoretically make it make sense because that helps us to understand you know, the accrual basis, cash flow basis and it all so it’s a useful project to do. So first of all, we can name it something like this we can say increase, decrease in accounts receivable in kind of like our worksheet. At the end of the day, we’re gonna have to say whether it’s an increase or decrease now we can see here from our worksheet that we went from 80,007 50 to 77 100. That’s a decrease. We see that it’s a decrease. The problem is we don’t know what to do with a decrease necessarily over here on the cash flow statement, because this is a decrease to accounts receivable, but we’re really trying to back into what’s happening with cash, what’s happening to cash. And so we’re not really concerned really even with accounts receivable, we’re concerned with the thing that accounts receivable is related to that thing is actually revenue sales, the income statement side the activity side of things. So this helps us if we use this little format, where we’re just saying that increase is going to be bracketed, that means negative for this statement, decreases non bracketed meaning it’s going to be positive.



So if you use this little kind of cheat sheet for any kind of asset, all assets will basically work in this way, except for contra asset, like accumulated depreciation, in that anything that increases is going to be a decrease for the cash flow, anything that decreases is going to be an increase for the cash flow. So you can also think of it kind of like the accounts receivable is reversed as than what you would think Any asset will will follow that condition kind of reversed, which you would think, meaning if there’s an increase, we’re going to subtract it. And if there’s a decrease, we’re going to add it. Here, there was a decrease, so we’re going to add it. Now it’s useful to think think through this, I would think through this with accounts receivable and accounts payable, and then apply the same theory to every other liability and asset type account. So if we do that, then we would say, well, what’s the journal entries related to accounts receivable? When does accounts receivable go up? When does the accounts receivable go down? So accounts receivable goes up? When we have a debit to accounts receivable and typically a credit to sales when we make a sale on account when we make a sale on credit.



Accounts Receivable goes down, when we get paid on account when cash goes up with a debit and we credit accounts receivable. So if we think about this, we’re going to say okay, this belongs In the operating activity, because we have sales here, we’re dealing with something related to the income statement. And therefore, this is really what we’re kind of looking for on, you know, the income from operations. That’s why it’s an operating activity. In net income. However, we’ve included if this were the case, this entire sales number, if this was if this represented all the activity, we’re including this entire sales number there whether or not we received the cash. So what we want to do however, is just include the amount that we received the cash for under a cash basis. So if we think about this in terms of a general ledger, debits and credits for the accounts receivable, this amount is increasing the accounts receivable and this amount is going to be decreasing the accounts receivable. So when we look at the balance for accounts receivable, what’s the change the change go up or down if we have more of these than these happening throughout the time period, then the accounts receivable is going to increase over time. So if we thought about it net, everything happening, everything that happens in accounts receivable, in other words is basically this journal entry, or this journal entry.



And if accounts receivable went up, meaning at the beginning balance in this case, it was zero if it went up, say this wasn’t here, and it went up by 1000. That would mean this side of the journal entries has happened more often or at least in a bigger dollar amount. And so what does that mean for our cash flow statement? It means that we’ve got some sales that are an accounts receivable that we never got cash for. And we’ve got to reverse those out. Because we’re on a cash basis here, we can’t recognize those sales. So that’s why when there’s an increase in accounts receivable, we actually need to decrease it from net income to get it to a cash basis. If on the other hand, the accounts receivable account went down, that would mean that this transaction happened more often or in a bigger dollar amount over time over the life of the Year in this case than this meaning our accounts receivable would have would have decreased by the end if we started at 1000 and ended at something less than 1000. If that were the case, it would mean that this transaction happened more than this transaction. In other words, we would have received more cash on account, then we made sales on account. And if you take that in net, that would basically mean that we would be receiving cash for sales for the prior year. And if if we got the cash this time period, then we need to recognize the revenue this time period.



So what’s going to happen is if there’s a decrease in accounts receivable, we’re going to increase the cash account or the net income and the cash flow in the cash flow statement. And so note that that’s going to be the case for any type of asset accounts going to follow this type of thought process. So I would think this through with The accounts receivable and then we’ll do the same with the liability in terms of accounts payable, and then apply that concept everywhere else meaning any asset that is going down, like the accounts receivable or any asset, if it goes up like the accounts receivable, if the accounts receivable goes up over the time period from last year to this year, then we’re actually going to decrease the cash flow statement for that change for the argument that we have here. If the accounts receivable or any asset goes down, then we’re actually going to increase the cash flow statement for the argument we have here.



So it’s worth thinking that through with these transactions and thinking what that means, and then when you do the cash flow statement, however, you probably want to just have it memorized which way the cash flow statement will go. So when you’re taking a test or you want to put this together quickly, you’re not trying to reconstruct every time what is actually happening. I would do it however, for the two main accounts, accounts receivable and then accounts payable For liabilities, and then apply that same logic to all other assets. So here’s kind of your cheat sheet type of thought process, we’re just going to write down brackets mean, we’re going to subtract for this cash flow statement bracketing, we’re bracketing the increases, because if accounts receivable or any asset increases, we’re going to decrease it or I mean, we’re going to Yeah, we’re going to decrease it for the statement of cash flows. If any of these asset accounts decreases in terms of what actually happened to the account, then we’re going to increase it in the statement of cash flows. And we can see that here we can see that the accounts receivable went from 80,007 50 down 77 100 decrease. So we’re increasing the statement of cash flows, we’re increasing net income. Once we understand this for this asset, we can apply the same rule the same kind of cheat sheet type of item to every asset. And then when we think about the liabilities, it’s reversed. We’re going to have the Increase be non bracketed, and we’re gonna have to decrease the bracketed and the liabilities are kind of more what you would think would happen, meaning if liabilities go down, then we’re going to decrease the cash flow. If liabilities go up, we’re going to increase the cash flows.

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