CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
An analyst reconciles a company's statement of cash flows with its income statement and balance sheet. During the year, accounts receivable increased. Holding all else constant, in the indirect method of presenting cash flow from operating activities, the increase in receivables is most likely:
An increase in accounts receivable is subtracted from net income in the indirect method. Sales were recorded as revenue but not yet collected in cash, so net income overstates cash received from customers and must be reduced by the receivable increase.
- Asubtracted from net incomeCorrect
- Badded to net income
- Cignored because it is a non-cash balance sheet item
Explanation
Revenue is recognized in net income but the cash has not yet been collected when receivables rise. Under the indirect method, the increase in an operating asset is subtracted from net income to reach operating cash flow. Adding it would overstate cash collected, and ignoring it would leave net income unadjusted for uncollected sales.
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