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Next, net income is adjusted for the changes in most current asset, current liability, and  income tax accounts on the balance sheet. The accounts receivable balance decreased  $663 from $19,230 to $18,567. As cash is increased when cash is collected from  customers, a decrease in the accounts receivable balance represents an increase in  cash. Therefore, the $663 is added back to net income. If the accounts receivable  balance increases, the amount of the increase is subtracted from net income, the  opposite of what happens when the balance decreases. The inventory balance  increased $107. As inventory is purchased, cash is assumed to be paid, so the $107  increase in the inventory balance is subtracted from net income (a decrease in the  inventory balance would be added to net income). Similarly, the $142 increase in the  prepaid expenses balance is also deducted from net income. The accounts payable 
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This note was uploaded on 11/15/2011 for the course ACCT 2310 taught by Professor Staff during the Spring '09 term at Texas State.

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