Accounts receivable on cash flow statement
Introduction
In accounting, cash flow statement is a financial statement that reports the cash flows in the company that comes from various activities during the period including cash flows from operating, cash flows from investing activities and cash flows from financing activities.
Cash flows from operating activities include the cash transactions that generate revenues and incur the expenses on the income statement. Likewise, we can prepare the schedule of cash flows from operating activities under the indirect method by reconciling the net income on the income statement in order to arrive at net cash.
This can be done by adding back the non-cash expenses to the net income as well as making adjustments with the changes in non-cash current assets and current liabilities to reconcile the net income to the net cash. And the increase or decrease in accounts receivable is one of the adjustments that we need to make on the cash flow statement.
Meanwhile, cash flows from investing activities include the cash transactions related to the investments. They include the purchase and sale of investments such as debt investments and stock investments as well as the purchase and disposal of fixed assets.
And cash flows from financing activities include activities that we use to obtain cash as well as paying back the cash that originates from such activities. These activities include issuing the debts and shares of stock and paying back the debts and repurchasing the shares as well as paying out interest and dividends.
Increase in accounts receivable on cash flow statement
Accounts receivable is the amount that customers owe us for goods or services that we have provided but have not received cash payment yet. Likewise, the accounts receivable occurs when we make the sales of goods or services on credit.
In this case, when we make the credit sale of goods or services on credit, we can make the journal entry by debiting the accounts receivable and crediting the sales revenue account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | xxxx | |
| Sales revenue | xxxx |
In this journal entry, there is an increase in account receivable (debit). However, there is no cash inflow as a result of the sale.
This has a negative effect on cash flow as the increase in accounts receivable will result in less cash inflow to the business since the cash is built up in the accounts receivable. As a result, it will decrease the cash flow for the business in the current period.
In this case, when preparing the indirect cash flow statement, we need to deduct the increased amount of accounts receivable from the net income in order to reconcile the net income to the net cash.
Hence, we can make the adjustment for the increase in accounts receivable in the schedule of the cash flows from operating activities as below:
Increase in accounts receivable on cash flow statement
| Cash flows from operating activities | |||
| Net income | xxxx | ||
| Adjustments to reconcile net income to net cash flows from operating activities | |||
| Depreciation and amortization | xxxx | ||
| Increase in accounts receivable | (xxxx) | ||
| Increase in non-cash current assets | (xxxx) | ||
| Increase in current liabilities | xxxx | ||
| Net cash flows from operating activities | xxxx | ||
Decrease in accounts receivable on cash flow statement
On the other hand, when we collect the cash payment from the customers for their previous credit purchases, we can make the journal entry for the accounts receivable collection as below:
| Account | Debit | Credit |
|---|---|---|
| Cash | xxxx | |
| Accounts receivable | xxxx |
In this journal entry, there is a decrease in accounts receivable (credit). However, there is an increase in the cash account (debit) as a result of receiving cash payments from the customers.
Likewise, a decrease in accounts receivable has a positive effect on cash flows as it frees up the cash that has built up in the accounts receivable. Hence, a decrease in accounts receivable will increase the cash flows in the business for the current period.
In this case, when there is a decrease in accounts receivable, we need to add the decreased amount to the net income in order to reconcile it to arrive at net cash flows from operating activities.
Hence, we can make the adjustment for the decrease in accounts receivable in the schedule of the cash flows from operating activities under the indirect method of cash flow statement as below:
Decrease in accounts receivable on cash flow statement
| Cash flows from operating activities | |||
| Net income | xxxx | ||
| Adjustments to reconcile net income to net cash flows from operating activities | |||
| Depreciation and amortization | xxxx | ||
| Decrease in accounts receivable | xxxx | ||
| Decrease in non-cash current assets | xxxx | ||
| Decrease in current liabilities | (xxxx) | ||
| Net cash flows from operating activities | xxxx | ||
So, we can summarize the adjustments for the increase or decrease in accounts receivable on cash flow statement as below:
| Increase in accounts receivable => deduct the increased amount from net income |
| Decrease in accounts receivable => add the decreased amount to net income |
Accounts receivable on cash flow statement example
For example, we have a $57,800 net income on the income statement for the period. And, at the end of the accounting period, after analyzing the changes in the non-cash current assets and current liabilities, there is a $7,300 increase in the accounts receivable and other changes as in the table below:
| Non-cash current assets | Year 0 | Year 1 | Changes |
|---|---|---|---|
| Inventories | 85,800 | 95,800 | 10,000 |
| Accounts receivable | 35,200 | 42,500 | 7,300 |
| Prepaid expenses | 18,500 | 15,300 | (3,200) |
| Current liabilities | |||
| Accounts payable | 45,800 | 40,200 | (5,600) |
| Accrued expenses | 26,500 | 28,000 | 1,500 |
| Income taxes payable | 12,800 | 15,100 | 2,300 |
Additionally, there was a $4,100 depreciation expense charged to the income statement during the accounting period.
Prepare the schedule of cash flows from operating activities under the indirect method with the changes in accounts receivable and other information above.
Solution:
With the information above, we have a net income of $57,800 and the non-cash expense of the depreciation of the fixed assets of $4,100 for the period.
In this case, together with the table of changes in non-cash current assets and current liabilities, we can prepare the schedule of cash flows from operating activities under the indirect method as below:
| Cash flows from operating activities | |||
| Net income | $57,800 | ||
| Adjustments to reconcile net income to net cash flows from operating activities | |||
| Depreciation expense | 4,100 | ||
| Increase in inventories | (10,000) | ||
| Increase in accounts receivable | (7,300) | ||
| Decrease in prepaid expenses | 3,200 | ||
| Decrease in accounts payable | (5,600) | ||
| Increase in accrued expenses | 1,500 | ||
| Increase in income taxes payable | 2,300 | ||
| Net cash flows from operating activities | $46,000 | ||
So, as a result, we have $46,000 net cash flows from operating activities after reconciliation of the net income to the net cash with the increase in accounts receivable and other changes as well as adding back the non-cash expense above.