Lesson 67: Cash Flow Statement Using Indirect Method Part 4, Payables
In this lesson,
we will learn to adjust for accounts payable on the cash flow statement.
We've already adjusted for accounts receivable and
inventory in the last two lessons,
the next part of preparing the cash flow statement is to
adjust for accounts payable in the operating section.
Accounts payable is considered a current liability account as the company is
receiving goods and is due to pay cash within a short period of time. This
lesson will wrap up the current assets and liabilities that are covered in the
operating section of the cash flow statement.
If you take a look at our balance sheet example, we are now moving over to
the right side for liabilities. We didn't mention the equipment and land
accounts yet, as they are considered long term assets and will be part of the
investing activities section.
The accounts payable figure has increased by $ 20,000 from
2012 to 2013. Now that we have the change in
accounts payable, we will need to
record the next entry on the cash flow statement.
Again, we need to determine whether this is a source or use in
order to
record it on the cash flow statement. Since the accounts payable figure is
increasing by the $20,000, it is a source. We know that it is a source because
accounts payable is a current liability that is going up.
In order to
best understand the reasoning behind why this example is a source of cash,
let's explain why the account would be considered a use if it was decreasing.
Accounts payable would be decreased if the company is paying off their debt
obligation, in which case it would debit the accounts payable and credit the
cash account.
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This example is a source as opposed to
a use because the company is not reducing the liability, they are
increasing the amount of accounts payable. For the cash flow statement, we
would be adding the $20,000 figure.
Since our balance sheet doesn't have any other current liabilities, this is the
only entry we would record out of that section. In the next lesson, we will
conclude the operating section by reviewing the remaining non-cash expenses.