 In this presentation we will continue putting together our statement of cash flows using the indirect method now taking a look at the change in inventory. We're going to be using our materials here with a comparative balance sheet, the income statement and some added information working primarily at this time from a worksheet that was made from the comparative balance sheet. Support accounting instruction by clicking the link below giving you a free 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. So here is our worksheet here's what we have so far we basically have a comparative balance sheet in trial balance type format where we have the current year the prior year and then the difference our goal is to find a home for all of these differences are in number that we're looking for is basically the 61900 change in cash so we've gone through this from top to bottom we're working through basically the operating cash flows from operating first the indirect method so we started off with the net income then we made our adjustments and then now we're going through basically the accounts receivable to inventory now once we get into the current assets we're all going to group those into this change in current assets under the cash flows from operations once we know the the theme here on what's going to happen with these current assets it's it's always going to be the same but we kind of we want to remember and remind ourselves the theory of what's happening here because this can be a little bit abstract in that we're looking for cash flows and we're taking the change for example in inventory here to find that and you might think well how does that work cash flows is a timing thing we're looking at a change in two points in time to balance sheet accounts well and that of course is that means that these two points in times the difference between them is going to be the activity that's happening so we're kind of backing into this change now we're not going to go through the the reasoning that we did with the accounts receivable I would recommend to think through the idea of accounts receivable and apply that same that same strategy to all other current assets so without process I recommend doing the same accounts receivable we figured out this to be the case for current assets that will be listed here in operating cash flows from operating actions and that will be that the increase will be actually if there's an increase here that's going to be a decrease for the statement of cash flows that's what the brackets represent and then if there's a decrease in the actual current asset that's going to represent an increase in the cash flows that's what this little cheat sheet represents once we know that we can just apply that to all current assets we could say well it's going to be the same for inventory so if there is a decrease then we're going to have it an increase here if there's an increase it's going to decrease over here so what happened it went from 250,700 to 240,600 and so there it went down we have the decrease so we're actually increasing over here that's going to be our custom to doing so now how do we know that the difference in the inventory is going to be in the statement of cash flows from operations rather than investing and financing one we know is just because it's a current it's a current asset and in this section says the changes in current assets will go here you also could think about well what's the journal entry related to inventory we could purchase inventory where we debit inventory and credit accounts payable or cash and we can sell the inventory which means that we're going to have costs of goods sold an expense account and that because of that expense account because it's related to the income statement can tell us that this is going to be dealing with the operating activities we're really trying to back into in a way the cash component of the expense information that's happening here on the income statement so we're really so that's why it's going to be an operating activity if you think through the journal entries and say okay there's a major part of this that deals with an income statement account cost of goods sold in this case then it's probably going to be on the operating activities now we won't go through the same logic we did with the accounts receivable because I would apply the logic to accounts receivable to think through when something should go up and down so remember for accounts receivable we we looked at the two journal entries one for an increase debit accounts receivable we credit sales and then for the decrease this is happening we debit cash and credit accounts receivable and if we think about the t account then we're trying to think in aggregate what is happening why are we doing this for the cash flow statement well if this happened on the accounts receivable then you would say well and this is another current asset that's why we're looking at accounts receivable then that would mean that we had sales increasing an account that adds into net income increasing net income more of this happened than this meaning we had more sales go up for which we did not get cash so if the total ledger for accounts receivable or current asset went up then we'd have to say well that means that it increased on an accrual basis and there wasn't cash that's why we have to decrease it on the cash flow statement that's why we have to take it out of the net income on the cash flow and over here if this happened more so if the gl happened to be the case where it went down the accounts receivable current asset went down then that would mean that we received cash on something that doesn't involve the income statement something that was recorded in sales last time period but here we want to record the sale when cash is received we want to we want to include it when cash is received and that's why we have to if the accounts receivable goes down then we have to increase the net income on the cash flow statement and that's going to be the same for you could think through the same type of thing with inventory it's a little bit more confusing because you got the the purchase of inventory in accounts payable possibly and selling it at a later time that's why I recommend thinking it through with accounts receivable and applying this same model to the rest of to the rest of the current asset accounts when we get to the liabilities we'll talk about accounts payable but we could just reverse this meaning if there's an increase in the liability it's going to decrease if there's an increase in the liability it's going to increase the cash flow and if there's a decrease in the liability it's going to decrease the cash flow and then we'll think through that however as well with the accounts payable