Question

In the statement of cash flows, a decrease in accounts payable is subtracted from net income in the operating activities section. But Why?

Answer 1

When we calculate the cash flows from operating activities in the cash flow statement from indirect method, we start with the net income. We will add back the non cash item of depreciation & adjust other gainsa or losses on sale of assets in it. Then we adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted.

Accounts payable is a current liability. A decrease in accounts payable means that some portion of accounts payable is paid in the current year (that's why their balance is decreased). When the accounts payable is paid, then cash is reduced. So, when cash is reduced, it is subtracted from net income in finding the net cash flows from operating activities.