Question

An increase in accounts receivable will result in a(n) ______ in cash from sales revenue when using the direct method to determine cash flows from operations.

Answer 1

When using the direct method for cash flows, one will notice that an increase in accounts receivable would result in a DECREASE in cash.

When an accounts receivable increases:

• It means that more debt has been incurred by debtors
• It means that less money entered into the company as people took goods but did not pay cash for them

Because the people did not pay cash for the goods yet took the goods, the company will see a reduction in its cash balance as the cash value of the goods left the company and there was no cash inflow from that activity.

In conclusion, an increase in accounts receivable leads to a decrease in cash.

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