Question

1. can you explain how an overall increase in A/R over the course of a year effects the statement of cash flows for that year, and what it indicates?

2. can you explain how depreciation expense is reported in the statement of cash flows?

3. can you explain how an overall decrease in Utilities Payable during the year effects the statement of cash flows for that year, and what it indicates?

Answer 1

Explanation to the above problem is as under:

1) Effect of Overall Increase in Accounts Receivable over the course of a year in Cash Flow Statement.

Account receivables are the amount of money due to enterprise for goods or services delivered to customers but not yet paid by them. Accounts receivables are part of “Cash In” vs accounts payable which equates to “Cash Out”. Account receivables arise owing to the customer.

In the cash from operations section, the increase in debtors is considered as a reduction from operating cash inflow as the debtors had not yet paid their dues at the time of statement date. In other words, increase in Accounts Receivable results in decrease in Cash Flow from Operating Activities as the amount got stuck and not realized from the debtors.

It indicates that:

If days sales outstanding grows, it indicates poor receivable collection practices, means a company isn't getting paid for items it sold. This leads to higher current assets, constituting a use of cash that decreases cash flows from operating activities.

2) Depreciation is a type of expense that is used to reduce the carrying value of an asset. It is an estimated expense that is scheduled rather than an explicit expense. Depreciation does not directly impact the amount of cash flow generated by a business, but it is tax-deductible, and so will reduce the cash outflows related to income taxes. Depreciation is considered a non-cash expense, since it is simply an ongoing charge to the carrying amount of a fixed asset, designed to reduce the recorded cost of the asset over its useful life. In other words, depreciation reduces net income on the income statement, but it does not reduce the Cash account on the balance sheet.

Under the indirect method, since net income is a starting point in measuring cash flows from operating activities, depreciation expenses must be added back to net income. An extract of Cash Flow Statement is as under reflecting the effect of Depreciation:

CASH FLOW FROM OPERATING ACTIVITIES

Net Income XXX

Add: Non Cash Expense

Depreciation Expense XXX

3) Effect of Overall Decrease in Utilities Payable during the year in Cash Flow Statement

Cash flow is based on cash accounting. It deals with how much actual money you've received and spent. It doesn't measure profitability, but in the short term, it's more important to staying afloat.

Decrease in Utilities Payable during the Year results in Outflow of Cash from the business (Settling down the dues owe to the company) thereby reflected as decrease in Cash Flow from Opreating Activities.