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how to adjust the net income for the channges in current assets and current liabilities?

how to adjust the net income for the channges in current assets and current liabilities?

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Answer #1

In a statement of cash flow using indirect method, net income should be adjusted as follows to calculate net cash flow from operating activities:

1. Changes in current assets:

a. any increase in current assets: it should be deducted from the net income because increase in current asset means cash outflow.

b. any decrease in current assets: it should be added to the net income because decrease in current asset means cash inflow.

2. Changes in current liabilities:

a. any increase in current liabilities: it should be added to the net income because increase in current liabilities means cash inflow.

b. any decrease in current liabilities: it should be deducted from the net income because decrease in current liabilities means cash outflow.

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