A review of the balance sheet of Mathews Company revealed the following changes in the account balances: a. Increase in accounts receivable b. Increase in retained earnings c. Decrease in salaries payable d. Increase in common stock e. Decrease in inventory f. Increase in accounts payable g. Decrease in long-term debt h. Increase in property, plant, and equipment Required: 1. For each of the above items, indicate whether it produces a cash inflow or a cash outflow. 2. Classify each change as a cash flow from operating activities (indirect method), a cash flow from investing activities, or a cash flow from financing activities. Solution a. Increase in accounts receivable - This is a cash outflow as though the sale has happened but the money got blocked with the debtors. It increases working capital and hence is part of cash flow from operating activities. b. Increase in retained earnings - Increase in retained earnings happen largely on account addition of current year profits which already gets factored in cash flow statement as part of cash from oeprating activities. Hence increase in retained earnings is neither a cash inflow nor an outflow and does not get factor in cash flow statement. c. Decrease in salaries payable - This is savings in cost and will increase net profit. Net profit is consider as cash flow from operating activities. Decrease in salaries on its own will not gets recorded in cash flow statements. d. Increase in common stock - This is a cash inflow becasue increase in common stock means more funds has been raised by issuing incremental common stock to equity shareholders. This is a cash from financing activites. Increase on account of bonus shares or conversion of preference shares or convertible debentures into equity has been ignored. e. Decrease in inventory - Decrease in inventory means money blocked in inventory has been released and hence it is a cash inflow. It is a cash from operating activities and will form part of change in working capital. f. Increase in accounts payable - Increase in accounts payable means payments to creditors has been deferred which will decrease net working capital (current assets - current liabilities) and hence is a cash inflow. This is also a cash from operating activities and will be a part of change in working capital. g. Decrease in long-term debt - This means debt has been repaid and hence it is a cash outflow. This is a cash from financing activities. h. Increase in property, plant, and equipment - It means there has been further investment into property, plant and equipment and hence on account of which such increase has happened. Thus it is a cash outflow and is a cash from investing activities. .

1. A review of the balance sheet of Mathews Company revealed the following changes in the
account balances:
a. Increase in accounts receivable
b. Increase in retained earnings
c. Decrease in salaries payable
d. Increase in common stock
e. Decrease in inventory
f. Increase in accounts payable
g. Decrease in long-term debt
h. Increase in property, plant, and equipment
Required:
1. For each of the above items, indicate whether it produces a cash inflow or a cash outflow.
2. Classify each change as a cash flow from operating activities (indirect method), a cash flow
from investing activities, or a cash flow from financing activities.
Solution
a. Increase in accounts receivable - This is a cash outflow as though the sale has happened but
the money got blocked with the debtors. It increases working capital and hence is part of cash
flow from operating activities.
b. Increase in retained earnings - Increase in retained earnings happen largely on account
addition of current year profits which already gets factored in cash flow statement as part of cash
from oeprating activities. Hence increase in retained earnings is neither a cash inflow nor an
outflow and does not get factor in cash flow statement.
c. Decrease in salaries payable - This is savings in cost and will increase net profit. Net profit is
consider as cash flow from operating activities. Decrease in salaries on its own will not gets
recorded in cash flow statements.
d. Increase in common stock - This is a cash inflow becasue increase in common stock means
more funds has been raised by issuing incremental common stock to equity shareholders. This is
a cash from financing activites. Increase on account of bonus shares or conversion of preference
shares or convertible debentures into equity has been ignored.
e. Decrease in inventory - Decrease in inventory means money blocked in inventory has been
released and hence it is a cash inflow. It is a cash from operating activities and will form part of
change in working capital.
f. Increase in accounts payable - Increase in accounts payable means payments to creditors has

2. been deferred which will decrease net working capital (current assets - current liabilities) and
hence is a cash inflow. This is also a cash from operating activities and will be a part of change
in working capital.
g. Decrease in long-term debt - This means debt has been repaid and hence it is a cash outflow.
This is a cash from financing activities.
h. Increase in property, plant, and equipment - It means there has been further investment into
property, plant and equipment and hence on account of which such increase has happened. Thus
it is a cash outflow and is a cash from investing activities.