Question

In a worksheet for the statement of cash flows, a decrease in accounts receivable is entered in the reconciling columns as a credit to Accounts Receivable and a debit in the: a. investing activities section. b. operating activities section. c. financing activities section. d. None of the above.

Short answer

b. operating activities section.

Step-by-step solution

Understanding Accounts Receivable

Accounts Receivable (AR) represent the money owed to a company by its customers for goods or services delivered on credit. A decrease in AR indicates that the company has collected cash from its accounts receivable, which is considered a cash inflow.

Understanding the Statement of Cash Flows

The statement of cash flows is a financial statement that shows the changes in a company's cash position. It is divided into three sections: operating activities, investing activities, and financing activities.

Linking Decrease in Accounts Receivable to Cash Flow Sections

In the statement of cash flows, the operating activities section includes all cash flows related to the company's primary operations, such as cash collected from customers. A decrease in accounts receivable signifies that cash has been collected. Thus, it affects the operating activities.

Answering the Question

Based on understanding from previous steps, a decrease in accounts receivable is entered as a debit in the operating activities section, reflecting cash collected from customers, which increases the cash flow from operations.

Key concepts

Accounts Receivable

Accounts Receivable (AR) is a critical component of a business that provides products or services on credit. When a company allows its customers to pay at a later date, it records the owed money as accounts receivable. These are essentially IOUs from customers, expected to be paid within a particular time frame. When the accounts receivable balance decreases, it indicates that some customers have settled their debts, providing the company with cash inflow. Thus, a decrease in AR is an essential signal of effective cash management in a business. It reflects successful collection efforts by the finance team, positively impacting the cash available for daily operations. Understanding how accounts receivable affects cash flow is crucial for managing a company’s liquidity and ensuring there are sufficient funds for running the business smoothly.

Operating Activities

Operating activities are a fundamental category in the statement of cash flows. They reflect the core business operations that are crucial to maintaining company profitability and stability. This section includes transactions related to:

• Cash received from customers.
• Payments to suppliers for goods and services.
• Salaries and wages to employees.
• Other expenditures necessary for running day-to-day business operations.

By focusing on cash inflows and outflows from operating activities, companies can evaluate their operational efficiency. When accounts receivable decrease, the cash flow from operating activities typically increases, since this means that cash is collected from customers who paid their outstanding bills. This cash inflow is pivotal for sustaining ongoing business activities and avoiding liquidity issues.

Cash Inflow

Cash inflow is the term used to describe the movement of cash into a business. It is vital for ensuring a company has adequate resources to cover expenses and invest in future growth. There are several sources of cash inflow:

• Revenue from sales of goods or services.
• Collection of accounts receivable.
• Investment earnings, such as interest or dividends.
• Cash from disposing of fixed assets.

Recognizing a decrease in accounts receivable as cash inflow underlines the importance of efficient credit management and collection processes. As customers pay their dues, this immediate cash is classified as operating activities in the statement of cash flows, bolstering the company’s financial health. Effective cash flow management helps in making strategic decisions and maintaining operational agility by ensuring liquidity.