What is a potential impact of increasing Accounts Receivable?

• A. It increases cash flow
• B. It decreases cash flow
• C. It has no impact on cash flow
• D. It increases net income

Answer: (B)

Increasing Accounts Receivable typically indicates that a company has made more sales on credit rather than receiving cash immediately. As a result, while revenue may be recognized and ultimately lead to net income being reported, the actual cash flow from operations may decrease. This is because the company allows customers to take longer to pay their invoices, which can create a delay in cash inflow.

When Accounts Receivable increases, it means that more money is owed to the company but has not yet been collected. This ties up cash and can lead to potential liquidity issues if the company is not careful in managing its credit and collections processes. In a nutshell, higher accounts receivable can lead to lower immediate cash flow, as cash inflows from operations are hindered by the increased credit extended to customers. Thus, the correct understanding of the impact of increasing Accounts Receivable on cash flow is that it tends to decrease cash flow, as cash has not yet been received.