Question

Which of the following operating activities have a positive cash flow impact for a company?

	a.	Increase in accounts receivable
	b.	Decrease in accounts receivable
	c.	Increase in inventories
	d.	Decrease in accounts payable

Answer 1

a. Negative cash flow impact

b. Positive cash flow impact

An increase in accounts receivable during the year means that sales were made during the year, but the cash was not collected. This means that the net income includes non-cash sales that must be removed. Thus, an increase in accounts receivables should decreases show up as a decrease on the cash flow statement.
The opposite is true if accounts receivable decreases. This means that cash was collected during the year, but sales weren’t reported in net income. Thus, net income should be increased.

c. Increase in inventory has negative impact on cash flow. It indicates that a company has purchased more goods than it has sold. Increasing inventory requires cash outflow. Cash outflows have negative impact.

d. Decrease in accounts payable has negative impact on cash flow. Decrease in accounts payable means cash paid to creditors. Hence negative impact.