Next, we adjust net income from changes in working capital, also known as changes in operating assets and liabilities, including the following: Accounts receivable: When a sale is recorded as part of net income, but the cash has not yet been received from the customer, we must adjust the cash flows by deducting the increases in accounts receivable. Accounts payable and accrued expenses: Accounts payable and accrued expenses represents borrowing by the firm from its suppliers. This borrowing increases the cash available to the firm and must be added. Inventory: The cost of increasing inventory is a cash expense for the firm and must be deducted. Prepaid expenses: Common examples can include insurance premiums, rent, or any other service contracts where payment is made ahead of time. It is considered as part of current assets, must be deducted when calculating cash.Deferred revenue: Also known as unearned fees, is money received by a company for goods or services that have not yet been delivered or performed, and must be added when calculating cash.
Learn Changes in Working Capital with interactive examples and practice exercises in our Cash Flow Statement module.
This interactive learning module helps you understand Changes in Working Capital through hands-on practice and real-world examples.