An increase in accounts receivable during the period represents an increase in the amount of revenues that were not received in cash.  The amount by which the uncollected accounts receivable balance increases from one period to the next decreases the cash flow from sales by a corresponding amount.  Consequently, the increase in accounts receivables is deducted from net income.

An increase in inventory during the period also represents a use of cash.  When ending inventory is greater than beginning inventory for the period, the inventory increase is deducted from net income in the cash flow statement.

Interest payments and receipts are classified as operating cash flows.  This classification is explicit under the direct method, where interest payments and interest receipts are separate operating cash flows subtracted and added, respectively, to derive cash flow from operations.  Under the indirect method, on the other hand, this classification is implicit since net income is adjusted for bond discount and premium amortization to derive cash flow from operations.

Cash Flows from Operating Activities – Current Liabilities (Example)
Current Liabilities Balance Sheet
Increase		 Cash Flow
Change
Accounts Payable 58,318 58,318
Accrued Expenses 40,283 40,283
Income Tax Payable 1,720 1,720

Since prepaid expenses are cash expenditures of the current period for expenses of future periods, an increase demonstrates a use of cash.  The net increase in prepaid expenses in the period is deducted from net income in the cash flow statement.

While a net increase in an operating asset in period causes a net negative cash flow, an increase in operating liabilities results in a positive cash flow.  The ending balances of operating liabilities, such as accounts payable, accrued expenses, and income tax payable, represent cash amounts not paid at the end of the period.  Increases in these liabilities are added to net income in the cash flow statement.

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