Accounts payable on cash flow statement

Accounts payable

In accounting, accounts payable is the short-term debt that we have the obligation to pay back to the creditor in the near future. The accounts payable usually occur when we purchase goods or services on credit.

Likewise, when making the purchases of goods or services on credit, we can make the journal entry by debiting the asset or expense and crediting the accounts payable.

Account	Debit	Credit
Asset/expense	$$$
Accounts payable		$$$

In this journal entry, there is an increase in accounts payable increase (credit) as a result of making the purchase on credit. This transaction of the credit purchase has saved us from spending cash for the time being. Likewise, an increase in accounts payable has a positive effect on cash flows.

Later, when we make the cash payment to settle this short-term debt, we can make the journal entry for the accounts payable payment by debiting the accounts payable and crediting the cash account.

Account	Debit	Credit
Accounts payable	$$$
Cash		$$$

This journal entry will decrease the accounts payable (debit) as a result of paying our debt. However, this will lead to a decrease in cash balance (credit) as a result of cash outflow from the business. This means that the decrease in accounts payable has a negative effect on cash flows.

Cash flow statement

Cash flow statement is one of the financial statements that reports the cash receipts, cash payments, and net change in cash flows resulting from the operating, investing, and financing activities during the accounting period.

Likewise, the cash flow statement has three main components including cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities.

As the names suggested, cash flows from operating activities include the cash transactions that create revenues and expenses resulting in the net income at the bottom.

Meanwhile, cash flows from investing activities include cash transactions that involve the purchases and disposal of fixed assets and various investments including both debt investments and stock investments.

Lastly, cash flows from financing activities include various activities that we make to obtain cash including issuing the debts and shares of stock. Additionally, paying back the debts and repurchasing the shares of stock as well as paying cash dividends also included in this section.

Increase in accounts payable on cash flow statement

As mentioned, an increase in accounts payable has a positive effect on cash flows as it represents a postponement of cash payments that helps to free up cash in the current period. This results in an increase in cash flow in the business for the current period.

Hence, when there is an increase in accounts payable, we can need to add the increased amount to the net income in order to reconcile it to the net cash flows from operating activities.

In this case, when we prepare the schedule for the cash flows from operating activities under the indirect method, we can make the adjustment for the increase in accounts payable as below:

Cash flows from operating activities
	Net income		$$$
	Adjustments
		Depreciation expense	$$$
		Increase in non-cash current assets	($$$)
		Increase in accounts payable	$$$
		Increase in current liabilities	$$$
Net cash flows from operating activities			$$$

Decrease in accounts payable on cash flow statement

On the other hand, a decrease in accounts payable means that there is a cash outflow from business for the cash payment of debt. This results in a decrease in cash flow from the business in the current period.

Hence, when there is an increase in accounts payable, we need to deduct the decreased amount from the net income to reconcile it to the net cash flow from operating activities.

In this case, when we prepare the indirect cash flow statement, we can make the adjustment for the decrease in accounts payable as below:

Cash flows from operating activities
	Net income		$$$
	Adjustments
		Depreciation expense	$$$
		Decrease in non-cash current assets	$$$
		Decrease in accounts payable	($$$)
		Decrease in current liabilities	($$$)
Net cash flows from operating activities			$$$

In summary, we can make the adjustment for the changes in accounts payable on the cash flow statement as below:

Accounts payable increase => Add the increased amount to net income

Accounts payable decrease => Deduct the decreased amount from net income

Example of accounts payable on cash flow statement

For example, at the end of the accounting period, we analyzed the changes in the non-cash current assets and current liabilities in order to prepare the schedule of cash flows from operating activities under the indirect method of cash flow statement.

And as a result, we saw a $57,000 increase in accounts payable as well as other changes in the table below:

Changes to current assets and current liabilities	Amount
Inventory increase	$95,000
Accounts receivable increase	$30,000
Prepaid expenses decrease	$15,000
Accounts payable increase	$57,000
Accrued liabilities decrease	$35,000
Income taxes payable decrease	$10,000

Additionally, we had a $550,000 net income on the income statement for the period as well as a $50,000 depreciation expense that had been charged as an expense on the income statement during the period.

Prepare the schedule of cash flows from operating activities under the indirect method based on the information above.

Solution:

With the information on the changes in non-cash current assets and current liabilities as well as the non-cash expenses and the net income provided, we can prepare the schedule of cash flows from operating activities under the direct method as below:

Cash flows from operating activities
	Net income		$550,000
	Adjustments to reconcile net income to net cash
		Depreciation expense	50,000
		Increase in inventory	(95,000)
		Increase in accounts receivable	(30,000)
		Decrease in prepaid expenses	15,000
		Increase in accounts payable	57,000
		Decrease in accrued liabilities	(35,000)
		Decrease in income taxes payable	(10,000)
Net cash flows from operating activities			$502,000