Okay! So I'm taking a look at some financial statements to sort of get a better understanding of accounting. From what I know, the changes in operating assets and liabilities on the balance sheet SHOULD reflect on the cash flow statement.
For example, if Accounts receivable 2009 is 10 and 2010 is 20, then there is a $10 change.
Then in the cash flow statement, we should see minus 10 when reconciling income to net cash for 2010.
but in these statements, none of these are reflected. All the changes are not reflected with the exception of like 2 line items. Am i missing something here?
some companies group things into single line items like chgs. in working capital items or chgs. in other current assets liab. etc. another thing to take into account is some companies utilize factoring lines which may throw off your calculations
Ok let's go back to the fundamentals. The premise behind AR affecting cash flows assumes that all changes in AR would affect either an effective collection or payment of cash. This inherently assumes that increasing AR cannot be a result of both collections / payments of cash.
Now think about the different things that affect AR. You've probably thought of recording revenue and the resulting in crease in AR, which would decrease cash flow since the customers have not paid yet. Now think a bit deeper; if a customer takes $10,000 of goods, will he always pay you the full $10,000? What happens, accounting-wise, if he doesn't?
Now go back to our original premise. Would the transaction in the above paragraph affect the direction your AR is moving vs. the cash flow receipt/payment?
Spoiler below: So when a customer pays $9,000 instead of the full $10,000, you have to write-off your AR by $1,000 (we'll just look at the doubtful accounts portion instead of the bad debt expense portion for now). This means your AR is going down by $1,000. But by our premise in paragraph 1, AR going now is a good thing normally, right? Because it'd mean customers have paid the company, so the AR goes down by the payment amount. However, as you can see above, this is not always the case. If AR decreases, cash doesn't necessarily always increase by the same amount.
Good luck!
That makes so much sense. Thanks!!!
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