Question

7. How does the recognition of revenue on account (accounts receivable) affect the income statement compared to its effect on the statement of cash flow?

Answer 1

Answer:

Whenever there is a credit sale, revenue is recognized at the time of sale, and accounts receivables is created, and then revenue increases with the amount of sale, in income statement.

As accounts receivables is increased in indirect method such net increase in accounts receivables from previous year end is deducted under cash flow from operating activities,

Further, recognizing revenue by creating accounts receivable individually does not impact cash flow statement as no cash is affected until amount is collected from accounts receivables.

Thus on a net result, the effect shall be as follows:

Effect on income statement = Increase in income.

Effect on cash flow statement = No effect as does not involve cash