 In this presentation we will continue on with our statement of cash flows using the indirect method looking in on the change in accounts payable. We're going to be using this information or comparative balance sheet income statement and other information focusing primarily on comparative balance sheet 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 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 creating a worksheet with it looking like this this basically being the comparative balance sheet but in a post closing trial balance format we have our two periods and the difference between those periods here our goal is to find a home for all of these differences once we do so we'll end up with basically the change in cash that being our bottom line that we're looking for we've gone through this information in terms of the cash flows from operations we're currently looking through the current assets and now we're moving on to the current liabilities so we've looked at the accounts receivable the inventory the prepaid expenses we have these here we're moving on now to a liability and notice when we do that when we're working from the worksheet we're kind of skipping over some things here and there's two ways we can do this worksheet we could go through one by one line by line and try to figure out which where each of these lines go whether it be cash flows from operating investing or financing or we can kind of skip on what this what probably is done more often and we can do the cash flows from operating first because that's primarily where we look at so you know that's that's where most of the activity is going to be on and work from top to bottom on the cash flow statement so when we go through these accounts we can see okay cash well even though that's on the top of my worksheet it's down here on the cash flow statement that's our bottom line and then we go to accounts receivable we're going to move to accounts the current assets and then the current liabilities so accounts receivable is current we worked with that inventory is current we've worked with that prepaid expenses current we've worked with that that and then equipment not current that's something that's not a current asset or liability so what we do that is we could just say okay this specifically says current assets and liabilities so it's not going to go here or we can think through it and say well equipment when I buy equipment or sell equipment typically I debit cash I mean I debit equipment and credit cash or loan doesn't have anything to do with the income statement therefore not part of the cash flows from operating typically when we sell the equipment then we typically get cash and credit equipment we might have a game but really the principal part of it isn't part of the income statement either so equipment doesn't really belong on the statement of of operations of the cash flows from operations it's going to go in investing activities and then if we go down to the accumulated depreciation same thing we actually already did that we dealt with that in depreciation that difference is within depreciation and then we've got the accounts payable and that's a current liability which it lists right here that we're going to look at changes in current assets and current liabilities so we're here looking at this changing accounts payable then now we already did all these current assets and we noted this kind of terminology we figured out what happened with with accounts receivable we noted that when there's an increase over here it's going to decrease over here and when there's a decrease over here it's going to increase over here for current assets now we're going to liabilities and we could say well it's going to be the opposite meaning here's our here's our terminology now if it if it increases on our worksheet it's going to decrease on our cash flow statement it's going to reduce net income so again we could just figure out accounts receivable the logic of it and once we have that apply that same logic to all other current assets and just reverse it same logic being would indicate this reversal on the liabilities that be in the opposite then but then we want to think through this it's also useful to think through it in terms of accounts payable so I would think through these in terms of accounts receivable and accounts payable as to why we're increasing or decreasing these changes so for example here in the prior period we had 102,000 and accounts payable went down to 17,750 decrease of 84 to 50 that decrease that decrease is going to decrease the the net income on the cash flow statement whereas if we were talking about a decrease in a current asset it would increase so let's think about that and so we're basically looking at when there's going to be an increase and when there's going to be a decrease the two types of transactions for accounts payable so when does accounts payable go up typically let's think about an expense we're not going to think about inventory because that's kind of muddy the waters of a bit so let's just simplify this process and say that we we had an expense on account so we're going to credit the accounts payable something we owe in the future and we're going to credit the expense and we know that the expense then is going to be an income statement account and that's why we're dealing with the income statement so this will simplify the process if we go through through inventory of course then we it'll we'll get to the same result but it'll be a bit longer of a step to go through this will be a nice easy two-step just as we did with the accounts receivable so if we go to our t account then of course accounts payable is going up with a credit so it's increasing with a credit when does accounts payable go down well it goes down when we pay cash and we debit the accounts payable so these are the two things that are happening they're happening a lot so if we looked at the the gl there'd be a lot of activity but what we're looking for in total is what's happening in total and so if accounts if accounts payable goes up that means that this is happening more than this so in essence this happened more often so we can think about like in total this is kind of what happened more often if accounts payable increased meaning like the credit balance is is winning it went up in the credit direction it increased well if that's the case then we had recorded these expenses which decreases net income for which cash was not yet paid and so on on a cash basis we shouldn't have done that right we have to reverse that so we have a decrease in the net income that shouldn't be there and we need to then increase it back put it back in there so that that is why when there's an increase in accounts payable and we're going to apply the same logic to any liability then we're going to increase it on the cash flow because we've got to add it back in there because what happened is we have this expense that brought it down which wasn't cash related therefore we have to add it back if on the other hand if we look at all the transactions in this activity and we know that accounts payable went down then in total this transaction happened more than this one so more more happened more this one so we can take an aggregate basically this happened and what happened over here well we decreased cash we paid cash cash went out that's going to be part of our cash flow and the other side being accounts payable it's not an expense we're not recording the net income at this point in time even though the cash flow went out so if accounts payable went down we've got it we've got to record this cash flow that went that went down that's why when cash flow goes down we are going to when accounts payable goes down we are going to record a decrease in the cash flow statement you can also think of it of course that we're paying cash here when did we record the expense probably last year last time period we recorded the expense at the point in time that we that we incurred it so we incurred the expense and put it into accounts payable here and now we're taking it out but under a cash basis we should be recording that expense at the point in time cash was spent and it's not happening on this transaction that's why we're going to have to decrease the cash flow when the accounts payable goes down so once we go through this logic then we can apply this logic to any liability just as we did with the accounts receivable and even it might be easiest to think about the accounts receivable too because revenue makes net income goes up and it's a little bit easier to think about oftentimes to go through accounts receivable also you won't be thinking about things like inventory when you think about revenue and then just apply the reverse to any types of liabilities but just from a theory standpoint it's useful to think about both of them it's useful to think through the accounts payable what's happening here why are we doing this to the net income so once you have that once we've thought through that then we can just write this down have a little cheat sheet and say well if there's an increase in our worksheet on a liability then we are going to increase our cash flow if there's a decrease on our worksheet then we're going to decrease the cash flow here once we have all this set up then that's our that's going to be our last current portion so we're then going to sum these items up and when we sum them up it's common to not pick all these up remember we're going all the way back up to the top here so we're picking up the net income the depreciation and then the accounts receivable inventory prepaid expense accounts payable to get to this 51 650 we brought it to the inner column and then summing this up to the outer column these don't represent debits and credits this represents a summing of you know just a a subtotal in the inner column of the cash flows from operations that we then break out and we're going to call it net cash flows from operating activities now this one is usually cash flows from but just note the terminology if we if cash flow went down we'd have to say used in or something like that to indicate in the words the decrease so whenever we do these cash flows we'd have to we have to be a little bit more careful in terms of of the terminology as well when we finalize this this is basically just more of a worksheet to get the numbers the numbers worked out also note that we still have to make adjustments to net income depreciation and loss so we're not done but we're going to we're going to find a home for all of these numbers and then we're going to go back and make those adjustments