 with all of these accounts just to make the worksheet work. That's just how the worksheet's gonna work. Don't worry about this side over here. That's gonna be when we adjust the information. First thing you're gonna probably say is well you know we have an income statement. Let's go look at the income statements. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. See if that's the right number and if we go over here and we go to the income statement we're gonna say no it's not the net income is 158.1. It's not the change in retained earnings or doesn't appear to be in this case and why would that be? Because there's more things happening in the retained earnings. What else could have happened? We could have paid dividends. We could have you know paid dividends on it. So obviously we did pay dividends on it but once again we're gonna have to break that out. We're gonna have to break that out later into multiple different numbers. So I'm gonna basically highlight this and say you know what that number is not right but before I start breaking that out let's find a home for all these numbers. Let's be in balance then let's go back and break that out into its components. So that's why I'm not gonna go to the income statement at this point except to verify the fact that that number is going to need more work to it. Alright but now we found a home for this one so I can say that's good. I'm gonna make this one green. Found a home for it. Alright for the rest of it I'm gonna just go from this side down. So remember we're gonna skip cash because that's gonna be the ending. We're gonna go to receivables next time. So we got this change in receivables and the question is where are we gonna put the change? Is it in the cash flows from operations, cash flows from investing, cash flows from financing and what you want to do is think about well is there an income statement account related to receivables and the way to think about that is well what's the most common journal entry we have with receivables we probably sell something on account therefore we debit receivables and we credit revenue. Revenue being an income statement account therefore this is something that's probably gonna go it is gonna go on the statement of operations because the statement of operations is the income statement on a cash flow basis. It's us adjusting net income to a cash flow basis. So the difference in retained earnings is going to be on the operating sections. Now we've got two different sections. We have adjustments to reconcile net income to net cash provided by operations and we've got changes in current asset and current liabilities. You're kind of just gonna have to know and start to feel where that goes. The accounts receivable is a current asset therefore it's gonna be here in the change to current assets. The next question is will it increase or decrease net income and we'll talk about that. You may want to first just have a cheat sheet with you to memorize the rule and then think through it. You don't really want to go into a test and have to think through the rule again even though it's a good practice to think through the rule because in a test taking situation it's really easy to get all tied up on it. So the general rule is gonna be this you can write it down it's gonna be increase I'm gonna put a negative and then decrease and what this means is that if accounts receivable went up then it's gonna bring our cash flow down. So our net income here is gonna go down if the accounts receivable went up. If however accounts receivable went down then AR is going to increase. So let's take a look at what we have and then we'll get into some detail on that. We're gonna say that accounts receivable went from 80,750 down to 771 that's going to be a decrease in accounts receivable therefore it's going to bring up the cash flow statement here. So it's actually we're gonna use our same formula we're always gonna say negative of this number means it's gonna be an increase meaning I'm gonna put the formula in here right now we're gonna say this equals the sum this is the total cash flow of all of these from the net income down to here and obviously what that does is it it brings up this number so that's what's gonna happen for all assets basically if accounts receivable went down or if the asset went down we're gonna add it or increase the cash flow. So now let's try to think through why that would be we're not gonna think through why it would be for all accounts but the same kind of logic for receivable will be applicable to all other accounts so if we think about the receivable account how does it go up or down well a receivable account goes up if we sell something on account where we're gonna debit accounts receivable credit sales so that's the transaction that happens when and we don't get any money for it and when does it go down that's when we collect cash and then we debit cash and credit the receivable so what that means is that if accounts receivable went down overall that second transaction happened more often than the first transaction meaning the second transaction we got cash on a cash basis we got more cash than we did have sales so you can kind of think as a net as a net hole we debited cash and we credited accounts receivable and on a cash basis we need to recognize the fact that we we got cash and therefore we should be recognizing the kind of like the revenue on the time period that we receive the cash so that's and the reverse would be the the other logic would be reversed if accounts receivable went up that means on a net basis we did more of the transaction of we debited making sales on account we debited accounts receivable and credited sales and therefore we have in net income we would have in that case in net income money that we have not yet received because we've received it on account we haven't got the money yet therefore if accounts receivable went up we're gonna have to bring it down we're gonna have to bring net income down by the change to get it to a cash basis because we haven't yet got that money so you can kind of think through that logic i know that i could get confusing but and on the test i would just have you know your little cheat sheet where you got the increase is going to bring bring it down and the decrease is going to bring it up where you can just kind of remind yourself on all assets all other assets will be the same so i'm going to highlight that and say we found a home for that inventory we're going to do the same type of analysis so i'm just going to write down the same basically thing here i'm just going to copy this down but then i'm going to make it for inventory and again i won't go through the logic again but it's the same rule for all assets basically increase is going to bring it down decrease bring it up we're going to use the negative formula to point to that 10 1 which will flip the sign and that will bring up the balance so inventory went from 257 down to 246 meaning we're going to have to add it back add back the difference to the cap to the net income for the cash flow statement all right i'm going to highlight that we found a home for that then we've got the prepaid expense we're going to have the same idea here so i'm going to copy that down that is also an asset so we're going to do the same same thing i'm going to put negative of that number it's going to flip the sign and once again an increase brings it down it decrease makes it go up and what happened it decreased therefore it brings up the balance going to highlight that we found a home for that we're now going to the equipment now when we think about the equipment account we've got to think well where is the equipment going to go is it going to go to the cash flows from operating cash flows from investing cash flows from financing and when we buy the equipment you can think about if we purchased more equipment like a new building or some or you know a new forklift then we do do we put anything on the income statement and the answer is no we debit the asset and we credit cash if we bought it for cash we do expense it over time called depreciation expense but when we buy the building itself not affecting the income statement therefore it's not going to be on the cash flows from operating which is basically the cash flow part of the the the income statement part of the cash flow statement therefore it's going to either be in investing or financing and a lot of people get this one kind of kind of mixed up it's actually going to go into the investing and i know when i was learning this i always thought well investing means stocks and bonds that's what investing means but when we think about the business investing means anything that we're putting into a long-term investment in order to help us generate revenue in the future so we are in this case investing in the equipment putting our money into the equipment so that it can help us generate revenue in the future so that is an investment in that sense so i know that can be a little confusing but that's where the equipment's going to go down here and if the equipment went up we're going to assume that we bought more equipment what happened well that change must be a result that we bought more equipment so we're going to make that assumption right now now i'm going to put this in here i'm going to put the difference of 62 to 50 and make the assumption that we bought that equipment with cash then i'm going to make it yellow just like we did up here because that might not be the case right we could have bought it for i mean it's very possible that if we bought equipment that we financed a large part of it and if that's the case then we didn't pay cash for it fully and we'll have to go back and break that out into a couple different numbers but let's find a home for all these numbers first and then go see if that's the case or not so we're going to put cash paid for the purchase of equipment because we're talking about the cash flow statement we're going to do the same thing we do all for all these numbers i'm going to put a negative and then point to that 62 to 50 and that'll flip the sign so it's going to be a decrease in this case it's going to decrease the cash flow and then i'm going to highlight this and say we found a home for that and once again i'm going to make this yellow because i'm going to i want to go back and check that i want to see okay did we pay cash for it what what was how did we buy that did we finance part of it it's very possible that we financed part of that okay let's take a look at the net then we have accumulated depreciation here now the accumulated depreciation if we think about that once again where does it go it's a good does it go in the cash flow from operating investing or financing and you might be thinking well it's related to the equipment why doesn't it go you know it should go into the investing over here but if you think of the other side again of the accumulated depreciation when do we uh journalize that account well the journal entry is always debit depreciation expense and credit accumulated depreciation and that expense the other side is an income statement account so that means if it if it's an income statement account it's going to be up here in the operating section so that's going to be part of the operating section and it's not going to be down here and changes in current liabilities it's going to be up top in this case and we just put it up top because this is kind of something that is on the income statement and we recognize the expense but of course there's no cash related to it so you know the cash either got paid when we purchased it or or whenever the financing terms are so we're just going to put it up here and put depreciation and we're going to say that that's going to be a negative of this 15 750 and there we have that and it's going to bring net income back up now if we think about that why would that happen well because when we uh expensed it it brought net income down so this number includes net income bringing it down however uh this depreciation expense has no nothing to do with cash therefore it needs to be backed out it needs to we need to increase the net income by the depreciation expense so we're going to go ahead and highlight that we found a home for the depreciation expense now we do want to verify that too on the income statement so i might want to highlight that here and say you know it's possible i want to check the income statement and make sure that the depreciation expense equals 15 750 is there a time when it wouldn't equal 16 750 yes there is what if we what if we sold equipment or had disposals of equipment so that we just we want to double check that number and see if any other things happen but we want to do that a little later time because we don't want to start you know messing all these numbers up and without uh first being in balance all right so now let's go to the payable we got the payable account here uh we think about the change in the payable account if we think about what the other account is related to the payable well oftentimes we would debit an expense and credit the payable uh or or debit inventory and credit the payable but then cost a good sold is related to that so that means that those are income statement accounts the expense and the cost of good sold therefore uh we want to put the change in the payable into the cash flows from operations it's going to be down here in the changes in current assets in current liabilities so we did the current assets now we're going to do the current liabilities this is the only current liability that we will be doing and uh note that it's going to be of course opposite from the assets so when we think about it we might want to just again have the cheat sheet rule these are all the assets that are doing this an increase is going to bring down the cash flow a decrease is going to bring it up so that means that the accounts payable is of course the opposite so that means that an increase is going to increase and a decrease is going to decrease and again you really want to have kind of a cheat sheet a crutch on on a test or something because you could get totally backwards on when you start thinking about these but it is good practice as well to think about this because if you can understand this then you're really kind of understanding the accrual process so the accounts payable why would that be why would it be that um if if the accounts payable is going up then we're going to increase the net income well the two journal entries that happen to accounts payable when we think about accounts payable we're gonna you know uh we bought something on account which means we debit expense and credit accounts payable making accounts payable go up and the other thing that happens is we pay it off we pay off the accounts payable by paying cash crediting cash and debiting accounts payable so if accounts payable went up then we can say that on on a whole on net then we purchased more things on account then we paid off on account meaning we debited the expense and we credited accounts payable more often than than the other side so as a whole we can think of it the change as a whole is that we basically debited an expense or something and then we credited accounts payable so we expensed something that we didn't pay for in in that sense and therefore we're recording an expense that needs to be backed out so we have an expense that brought down this number