Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period.Based solely on this information,cash flow will increase by:
A) $2,500.
B) $2,000.
C) $1,500.
D) $500.

Question

Quizplus · Accepted Answer

The increase in accounts receivable means that the firm has made sales but has not yet received payment for them. Therefore, cash flow has not increased by the full $2,000 in sales. The increase in accounts receivable represents a decrease in cash flow because the firm has an obligation to collect payment from its customers in the future. Therefore, the cash flow increase is equal to the difference between sales and the increase in accounts receivable, or $2,000 - $500 = $1,500.

Assume a Firm Generates $2,000 in Sales and Has a $500