What does an increase in accounts receivable signify regarding cash flow?

What does an increase in accounts receivable signify regarding cash flow?

• A. Cash payments increased
• B. Receivables are being collected
• C. More sales were made on credit
• D. Net income is understated

Answer: (C)

An increase in accounts receivable indicates that a company is extending credit to its customers, which often leads to more sales being made on credit. This situation arises when customers are allowed to purchase goods or services with the expectation of paying later, rather than requiring payment upfront. While this can boost sales figures reported in the income statement, it also suggests that cash has not yet been received for those sales, meaning that the company may face a short-term cash flow issue despite having higher reported sales. Understanding this relationship is crucial in financial analysis, as it highlights the difference between revenue recognized on the income statement and actual cash flow. Monitoring accounts receivable levels can thus provide important insights into a company's cash management and the potential risks associated with customer creditworthiness. The other options do not accurately represent the implications of an increase in accounts receivable. They do not connect with the relationship between credit sales and cash flow in the same way, underscoring the specific reasoning behind why increased accounts receivable is tied to increased sales on credit.

An increase in accounts receivable indicates that a company is extending credit to its customers, which often leads to more sales being made on credit. This situation arises when customers are allowed to purchase goods or services with the expectation of paying later, rather than requiring payment upfront. While this can boost sales figures reported in the income statement, it also suggests that cash has not yet been received for those sales, meaning that the company may face a short-term cash flow issue despite having higher reported sales.

Understanding this relationship is crucial in financial analysis, as it highlights the difference between revenue recognized on the income statement and actual cash flow. Monitoring accounts receivable levels can thus provide important insights into a company's cash management and the potential risks associated with customer creditworthiness.

The other options do not accurately represent the implications of an increase in accounts receivable. They do not connect with the relationship between credit sales and cash flow in the same way, underscoring the specific reasoning behind why increased accounts receivable is tied to increased sales on credit.