Why Is a Decrease in Accounts Receivable Added to Net

question 36

Multiple Choice

Why is a decrease in accounts receivable added to net income when determining cash provided by operating activities?

• A) Cash collections from customers were greater than the sales generated.
• B) Cash collections increased due to an increase in sales.
• C) Cash collections decreased due to a decline in sales.
• D) Cash collections from customers were less than the sales reported.

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Definitions:

Current Ratio

A liquidity ratio calculated as current assets divided by current liabilities, indicating the ability of a company to pay short-term obligations.

Current Liabilities

Debts or obligations that a company expects to pay off within one fiscal year, including accounts payable, short-term loans, and accrued expenses.

Current Assets

Assets that a company expects to convert into cash, sell, or use up within one year or within its operating cycle if longer than a year.

Reversing Entries

Journal entries made at the beginning of an accounting period to reverse or cancel out adjusting entries made at the end of the previous period.