Summary
Changes in Accounts Receivable (AR) directly impact a company’s cash flow by reflecting the timing difference between earning Revenue and collecting cash from customers. AR is a component of Net Working Capital (NWC).
Impact of Changes:
- Increase in AR:
- Meaning: The company sold goods/services (recognized revenue) but collected less cash than the revenue recognized during the period. Customers owe the company more money.
- Cash Flow Effect: Represents a use of cash. The company’s cash balance is lower than it would be if collections matched revenue.
- Cash Flow Statement Treatment: An increase in AR is subtracted from Net Income in the Cash from Operations (CFO) section.
- Decrease in AR:
- Meaning: The company collected more cash than the revenue recognized during the period (likely collecting cash from previous periods’ sales).
- Cash Flow Effect: Represents a source of cash.
- Cash Flow Statement Treatment: A decrease in AR is added back to Net Income in the Cash from Operations (CFO) section.
See also: Accounts Receivable, Net Working Capital (NWC), Cash Flow Statement, Revenue