Q14-10RQ - Horngren'S Financial And Managerial Accounting

Question

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Step-by-Step Solution

Answer

Answer

 

If current liabilities increase it is an increased adjustment to the net income. If there is a decrease in current liabilities it causes a decreasing adjustment from the net income.

Step 1: If current liabilities increase it is an increased adjustment to the net income

An increase in current liabilities means cash is not yet paid only expenses are recorded. Therefore, an increase in current liabilities causes an increased adjustment to the income.

 

Step 2: If current liabilities decrease it is a decreasing adjustment from the net income

Decrease in current liabilities is the opposite of an increase in current liabilities and hence it causes a decreasing adjustment to the net income.