Why Is Accounts Receivable A "Cash Outflow"?
When accounts receivable increases, you will be paying something in cash for that increase
With accounts receivable, you have to record it as revenue on the income statement
At this point you have NOT collected cash
On the income statement, the recorded revenue WILL be taxed by the appropriate tax rate and that represents a "cash outflow"
In A Nutshell: Since you have NOT collected cash, and you record A/R as Revenue on the Income Statement which is taxed and therefore represents a "cash outflow"
Best
The LA Bull
Accounts Receivable is a balance sheet account. As such, it is neither a cash inflow or outflow.
A DECREASE in A/R means you've collected from your customers, so that's a source of funds. Conversely, an INCREASE in A/R means you have extended credit to your customers, and that's a use of funds.
It has nothing to do with revenue, income statements, or taxes.
jgalt650 is correct. But to piggyback off that and explain in terms of your question...
Say you sell $5 of revenue today on credit (assume no COGS/opex for simplicity). Your taxable income as a result will be $5. At a 40% tax rate you will pay $2 in taxes (that will be paid in cash, even though you didn't collect your $5 today). So your net income is $3.
Looking at the cash flow statement, our net income is $3. Our receivables increased $5 (use of cash). So our net change in cash is $2, which is exactly what we paid in taxes. The point of the cash flow statement is to reconcile GAAP income statement to actual cash balances. One of the ways we accomplish that is by accruing / de-accruing working capital items on the balance sheet.
When we look to the balance sheet, we have said that your net income is up $3. To offset that change on the asset side of the balance sheet we have a $2 decrease in cash and a $5 increase in A/R, for a net increase of $3.
Hope that helps.
Excellent -- thank you for your response.
jgalt650 stated "it has nothing to do with revenue, income statements, or taxes"
Per your response, jgalt650 is incorrect, right? Because you stated it DOES have to do with revenue, income statements, and taxes
Revenue and taxes (and the income statement, generally speaking) are obviously related to the balance sheet and cash flow statement. Revenue and expenses recorded on the IS will impact the CFS or BS in some way. So yes, I'd say jgalt is incorrect by saying it has "NOTHING" to do with "revenue, income statements, or taxes"... Because they are all related.
Qui illum atque ut corrupti. Veniam inventore id eum quia. At sed qui eveniet voluptatem et. Odio ipsa eligendi eum placeat fugiat. Excepturi suscipit non quos sunt. Sed voluptate quae quia illo sed laborum. Nobis expedita quia enim voluptatem eos atque a minima.
Consequuntur eius sunt dolores amet culpa laborum dolor. Impedit explicabo iure nihil sint rerum sit.
Qui non earum omnis et ut ea. Incidunt ducimus quibusdam natus voluptas.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...