FAR Notes- Indirect Method of Cash Flows- Hope it Helps

So today some light bulbs when off and I thought that I would share. While working some practice questions with cash flows I could not rationalize how to figure out the reconciliation to cash. I kept getting mixed up on what to add and subtract when trying to back out certain things from net income (you know the indirect method)

This is one of the problems I got stuck on

Sooooooo this is how I figured it out and then it all made sense. First let me tell you that journal entries are your friends. If you know what side to put a increase and decrease on you already know the answer.

So here it is

Accts Receivable increased by $6000 Dr. Accounts Receivable $6000

Allowance Uncoll Acct Increased $200 Cr. Allowance $200

(remember allowance is a contra rec so its a normal credit balance. Increases are Cr. decreases are Dr.

Prepaid Rent Decreases by $4200 Cr. Prepaid Expense $4200

(this is where I was getting confused. I couldnt understand the effect on cash and what direction it should go since its a prepaid)

Accounts Payable Increases $3000 Cr. Accounts Payable $3000

Now I know what your saying, the entry doesn't balance and yes your correct but setting up the j/e will show you what to add and what to subtract from net income. Net Income has a normal credit balance so you add all the credits to Net Income and Subtract the Debits. And your answer is

$150,000+$3000+4200+200-6000 = $151,400

Hope that helped!