Background information Cost of goods sold +increase in inventory - decrease in inventory +decrease in accounts payable - increase in accounts payable Reporting Cash Flows from Operating Activities in Direct Method - An Illustration - Cash Payments for Expense Operating expenses - depreciation and other non-cash expenses +increase in related prepayment -decrease in related prepayments +decrease in related accrued liabilities -increase in related accrued liabilities Prepayment: If payment is made in advance, the payment ( asset account) termed prepaid expense, or "prepayment" Accrued liabilities: If payment is made in a later period, the payment reduces a liability for an accrued expense payable Background information Cost of goods sold +increase in inventory - decrease in inventory +decrease in accounts payable - increase in accounts payable Reporting Cash Flows from Operating Activities in Direct Method - An Illustration - Cash Payments for Expense Operating expenses - depreciation and other non-cash expenses +increase in related prepayment -decrease in related prepayments +decrease in related accrued liabilities -increase in related accrued liabilities Prepayment: If payment is made in advance, the payment ( asset account) termed prepaid expense, or "prepayment" Accrued liabilities: If payment is made in a later period, the payment reduces a liability for an accrued expense payable