Cashflow: Average accounts receivable

Suppose that your average accounts receivable was 10k in year zero. In year one this increased to 15k and then decreased to 10k in year three.

How would you represent this change in working capital?

Question options:

  • Increase in cash from working capital of 5k in year one.
  • Decrease in cash from working capital of 5k in year two.
  • Increase in cash from working capital of 5k in year two.
  • Decrease in cash from working capital of 5k in year one.
  • Decrease in cash from working capital of 5k in year three.
  • Increase in cash from working capital of 5k in year three.

Answer:

Working Capital = Current Assets - Current Liabilities

With the income statements cash flow statement form, we view the working capital as changes in the amount of inventory needed to keep on hand and changes in the amount of AR.

When the accounts receivable goes up then there is a:
Decrease in cash from working capital of 5k in year one.

When the accounts receivable goes down, it means you have changed that AR to cash and there is a:
Increase in cash from working capital of 5k in year three.

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