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Hello and I hope you are well. I have a question regarding the inventory, receivables and payable. Why do we record their fluctuation on the cash flow statement either as an inflow or outflow when we don’t really know if the receivables for example are cash or credit. What I mean is that we might have an increase on the accounts receivable, but this could all be on credit, so why do we record it as an inflow or outflow? THank you in advance
Hi,
All well, thanks. I hope the studying is going well.
If we have an increase in receivables then it will be due to the fact that the credit sales made will exceed the cash received from credit customers. As the credit sales will have increased then the profit will have increased (DR Receivables CR Sales) but the cash flow will not have increased. To remove this non-cash impact on profit then we need to deduct the increase in receivables.
The good thing is that you will never have to explain this in an exam and will only have to make the adjustment.
Thanks
Thank you very much. It does make sense now. I thought that this adjustment was a cash adjustment but this is just a non-cash movement as you wrote above. Thank you again.
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