Decreases in current assets cause operating cash flows to be higher than accrual-basis income.

Question

Quizplus · Accepted Answer

Decreases in current assets (such as accounts receivable or inventory) result in less revenue being recognized on the accrual-basis income statement, leading to a lower reported net income. However, these decreases also result in an increase in cash inflows (such as cash received from collecting accounts receivable or selling inventory), resulting in higher operating cash flows. As a result, operating cash flows can be higher than accrual-basis income when current assets decrease.

Decreases in Current Assets Cause Operating Cash Flows to Be