Crash Course in Accounting and Financial Statement Analysis, Second Edition

Changes in Accounts Receivable and the Lemonade Stand

Recall our income statement from the lemonade stand. Previously we assumed all sales were cash sales; now let’s assume that out of $100 in revenues generated by the lemonade stand in 2007, $50 were in cash and the rest on credit.

Since the company’s accounts receivable increased by $50 during the year (you sold $50 of lemonade on credit), we know that credit sales had a negative cash flow impact as they increased the accounts receivable balance instead of cash. Accordingly, increase in accounts receivable of $50 during the year must be subtracted from net income (Exhibit 7.8) on the cash flow statement in order to accurately depict the amount of cash generated by the company’s operations.

Exhibit 7.8. Increase in Accounts Receivable Has a Negative Cash Impact and Must Be Subtracted from Net Income to Arrive at Cash Generated by Operating Activities

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