Increase/(Decrease) In Current Liabilities

This class of reconciling item represents the change in liabilities related to operating activities. If the balance of liabilities increased from the balance reported at the end of the previous fiscal year, the difference is added to operating income to reconcile net cash flows from operating activities.

The reason behind adding a positive change is as follows:

• The expense related to these liabilities has already been recognized in the calculation of operating income on the operating statement.
• However, since the liability is increasing, no cash flow occurred to liquidate the payable.
• Therefore, cash flows did not occur and to reconcile net cash flows from operating activities, the amount that liabilities increased should be added back to operating income.

By the same logic, a decrease in liabilities represents a cash outflow (payment) greater than the expense recognized in the calculation of operating income on the operating statement.

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