(Substitute ' negative effect on Cash' for decreases in liabilities.) If a payable increases, it means the company did NOT pay all of the bills and that has a favorable effect on Cash.Īnother way to remember the effect is that the effect on Cash will be the SAME direction as a change in the liability account balance. To assist in understanding the increase or decrease, you could substitute ' favorable effect on Cash' for increases in liabilities. Since the starting point in the operating activities section is net income, you add back the increase in Income Taxes Payable. If Income Taxes Payable increased, the company did not pay the entire amount of Income Tax Expense shown on the income statement. An increase in any liability account (or in stockholders' equity) is assumed to increase Cash or at least be favorable from a Cash point of view. Income Taxes Payable is a current liability.
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