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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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An increase in accounts receivable is deducted from net income to obtain operating cash flows because

  1. a. cash collections increased due to increasing sales.
  2. b. cash collections from customers were less than the revenues reported.
  3. c. cash collections decreased due to declining sales.
  4. d. cash collections from customers were greater than the revenues reported.
  5. e. None of these.

To determine

Identify the reason for which an increase in accounts receivable is deducted from net income to obtain the operating cash flows.

Explanation

Operating Cash Flow:

The cash flow obtained from the operational and profit generating activities in a firm are termed as the operating cash flow. The operating cash flows increase or decrease the current assets and current liabilities of a firm.

b.

When the cash collections from customers are less than the reported revenues, it means that there is a decrease in the cash inflow from operating activities. To maintain the accrual basis of accounting and to match the amount recognized on the income statement the increase in accounts receivable should deducted from the net income. Therefore, b is the correct option.

a.

When the cash collections are increased due to increase in sales, this means an increase in revenue. For an increase in revenue, no increase in accounts receivable is reported...

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