Indirect Method (3)

Brian Krogol
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Alright. So let's use this logic of our changes in current assets and changes in current liabilities to finish up our example. Alright, so let's go go ahead. And we're gonna go back to our page with our balance sheet on it. So what we're gonna do is we're gonna look for our changes our changes in current assets and liabilities. That's what's gonna go into this rest of this section to finally figure out what our operating cash flow is. Okay, so the best way to do this is to go to your comparative balance sheet. And in this example I have included an extra column here, change an account balance. Now your professor doesn't have to give this to you. They could just give you the two years, they could give you this year's number and last year's number and then you have to figure out the change in account balance. Sometimes they'll give you the change in account balance and you don't need to do this calculation at all. But we're gonna do it every step of the way here. Okay. So the first thing we need to know is whether each account increased or decreased and what the change in account balance was there. Okay. So notice in this problem, since we're only focused on operating cash flows, all we're going to calculate is the current assets and current liabilities. Okay. Sometimes it's necessary to find the changes in in the Um investing accounts and in the equity accounts as well. But we're only focused on current assets and current liabilities. So let's do that just to save time here and remember, we don't need to do cash. Cash is the point of the entire statement. Once we finish our entire statement operating investing financing, our cash should be showing it should show us the change in cash from the beginning balance of 33,000 To the ending balance of 55,000. Right? So what we're focused on and like we saw in our in our example, it says changes in current assets, accept cash and current liabilities. So let's check those out. Our accounts receivable last year was 30,000 and now it's 20,000. So it's decreased by 10,000. Okay. So I'm gonna put it in parentheses to signal that it was a decrease of 10,000 And our inventory. Well last year it was 21,000 and now it's 30,000. So our inventory has increased by 9000. Right? You see how I'm calculating this, we're just taking the difference between the two years and then we're gonna stay whether it's positive or negative using parentheses for negative numbers. Okay, so those are changes in current assets. Let's check out our changes in current liabilities. So we've got two here, we've got accounts payable and income taxes payable. So the first one is accounts payable last year it was 12,000. Now it's 28,000. So we've had an increase of 16,000 from one year to the next income taxes payable last year, they were 8000. Now there's 6000. So they've decreased by 2000. Right? So notice this goes with the explanation I just gave you right? Because now we know the increase or decrease in each account. And if we remember that the assets are the opposites and the liabilities, well there the other one that goes hand in hand. Well then we're just about done with our operating cash flows using the indirect method. Okay, so now we're gonna go one by one. Let's start with accounts receivable. And we saw that it was a decrease of 10,000. So since assets are opposites, we're gonna say a decrease in accounts receivable. Well that's an increase to cash, right? Because they're opposites. So the decrease of accounts receivable of 10,000 is an increase to cash of 10,000. Let's do the next one. The next one was inventory, right? We had an increase of inventory. So over here we had an increase of inventory of 9000. Well, an increase, this is an asset. The assets are opposites. So the increase in inventory. Well, that's gonna be a decrease to cash, right? And that's gonna be in the amount of 9000. So now we've decreased for for the inventory now let's go on to the next one. Right? So this is the process. We're gonna go one by one with our current assets and current liabilities. We were done with our current assets. Let's do our current liabilities here, we had accounts payable and Income taxes payable. So accounts payable. Remember these go hand in hand, right? The assets are opposites while the liabilities they go together. So an increase in accounts payable is an increase to cash in the amount of 16,000. So we'll go down here and we'll say increase In accounts payable. And that was in the amount 16,000. And that's going to be our increase there. Right? So that's an increase. They go hand in hand. And what about the other one? We had income taxes payable and we had a decrease, right? A decrease in an income tax payable which is a current liability is a decrease to our cash. So the 2000 is going to be a decrease to our cash here. And guess what will be done at that point? We just need to do our final calculation so decrease in. I'm just gonna put tax payable just to save time here. So the increase the decrease in the tax payable was a decrease of 2000 to our cash. Okay so first thing we're gonna do is add up all of our adjustments because this is generally how we would show it on a on a statement. So we'll do 9000 plus 3000 plus 10,000 minus 9000 plus 16,000 minus 2000. So we get a $27,000 change in cash during the period because of our operations. And excuse me because of those adjustments, those adjustments total 27,000 and that's what we're going to add to our net income. This could have been a positive number, it could have been a negative number. It just depends on what happened during the period. Right In this case we got adjustments that came out to a positive 27,000. We're gonna add that to our net income of 100 and 45,000 And it gets us to our final answer here. 172,000 is our our net cash provided from operations. Okay. So from our operating activities we had 100 and 72,000 in cash. That's from starting with net income and then doing our adjustments for non cash expenses, gains and losses and then changes in current assets and current liabilities. This is pretty tough. This is one of the tougher lessons that you have in the whole course. So if you didn't get it on your first try we've got some practice problems where you're gonna get a little more experience with it and you can always redo this video to see how the process flowed. Okay, so as we go through your practice problems, go ahead and keep that first sheet handy where we have a summary of everything we just did and go ahead and try and solve these practice problems. Alright, let's go ahead and do that in the next video