Using the Accounts Receivable account, explain how a company may report net inco

Question

Using the Accounts Receivable account, explain how a company may report net income on its income statement using the accrual basis but report negative cash flow from operating activities on its statement of cash flows using the cash basis. [Hint: Assume that you calculate an excess of revenues over expenses (i.e., net income on the accrual basis) but your calculation of cash flow from operating activities (i.e., the cash basis) produces a negative number. That is, cash is used rather than provided. See chapters 1, 4 and 21.]

What steps do you recommend be taken to ensure that net cash flow from operating activities is positive next year? [Hint: Analyze the Accounts Receivable account.]

Explanation / Answer

While calculating net income n accrual basis, we subtract accrued expenses from accrued revenue. Hence,

Net income on accrual basis = Accrued Revenue - Accrued expenses

Now when we calculate cash flows from operating activities on cash basis, we add Decrease in accounts receivable balances and subtract Increase in accounts receivables balance .

Now accrual basis and Cash basis both are different methods of accounting. We may get profits as per accrual method and negative cash flows due to increase in accounts receivables same time.

IF we need net cash flow from operating activities to be positive next year, then the accounts receivable balance should get reduced as compared to this year .

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