Why are increases in accounts receivable, a cash reduction on the cash flow statement?

Question:

Why are increases in accounts receivable, a cash reduction on the cash flow statement?

Cash Flow Statement:

A cash flow statement in accounting is one of the financial statements prepared and it indicates the flow of cash in and out of the business. It is divided into three sections, the operating activities, investing activities and financing activities. The operating activities section shows adjustments to the net income, by adding back the depreciation and amortization amounts and adjusting any movements to the current assets and current liabilities.

Answer and Explanation:

Increase in accounts receivables.

The accounts receivables represents credit sales to clients. That is goods are purchased and revenue is recognized but no cash is paid meaning the cash balance of the business does not increase. Since the transaction is on credit terms, in preparing the statement of cash flow the increase is deducted.


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Preparing a Cash Flow Statement by the Indirect Method

from Accounting 301: Applied Managerial Accounting

Chapter 15 / Lesson 3
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