In reporting operating activity cash flows by means of the indirect method, the following pattern exists.
• A change in a connector account that is an asset is reflected on the statement in the opposite fashion. As
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shown above, increases in both accounts receivable and prepaid rent are subtracted; a decrease in inventory is added.
• A change in a connector account that is a liability is included on the statement as an identical change. An increase in accounts payable is added whereas a decrease in salary payable is subtracted.
A quick visual comparison of the direct method and the indirect method can make the two appear almost
completely unrelated. However, when analyzed, the same steps are incorporated in each. They both begin with the income for the period. Noncash items and nonoperating gains and losses are removed.