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.]

Above is what I need answered

Trout Corporation Income Statement For the Year Ended December 31, Year 2 Net Sales Revenue S2,000 Operating Expenses Cost of Goods Selling & Administrative Expenses $1,126 456 1,582 $418 Operating Income Other Income (Expense) $(80) Interest Expense Gain on Sale of Equipment Pre-Tax Income from Continuing Operations Less: Income Tax Expense: Net Income (75) S343 90 S253

Explanation / Answer

Accounts receivable increase when there is sale on account , thus when there is sales on account it will increase the net income , however under cash flow statement under direct or indirect method of accounting there will be increase in cash from operating activities only if the cash is received from debtors

Thus it will lead to increase in net income but will show negative cash flow if the cash is not collected .under direct method the cash received from customers is calculated as follows

Cash received = net sales – increase in account receivable + decrease in account receivable.

In case of indirect method the increase in account receivable is deducted from net income

Thus we see that inspite of positive income it can have negative cash flow in case there is increase in sales on account and not much cash is collected from the debtors

To insure positive cash flow we must see to it that the cash collected from the accounts receivable is high .if sales is made on credit we must ensure that the cash is collected as early as possible .

Accounts receivable increase when there is sale on account , thus when there is sales on account it will increase the net income , however under cash flow statement under direct or indirect method of accounting there will be increase in cash from operating activities only if the cash is received from debtors

Thus it will lead to increase in net income but will show negative cash flow if the cash is not collected .under direct method the cash received from customers is calculated as follows

Cash received = net sales – increase in account receivable + decrease in account receivable.

In case of indirect method the increase in account receivable is deducted from net income

Thus we see that inspite of positive income it can have negative cash flow in case there is increase in sales on account and not much cash is collected from the debtors

To insure positive cash flow we must see to it that the cash collected from the accounts receivable is high .if sales is made on credit we must ensure that the cash is collected as early as possible .

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