Final answer:
The collection of an account receivable is a cash inflow that is recorded under operating activities in a company’s cash flow statement. It shows money entering the company from credit sales previously made, indicating positive cash movement that enhances the company's liquidity.
Step-by-step explanation:
The collection of an account receivable is classified as a cash inflow in cash flow activities. When a business collects money that a customer owes from previous credit sales, this results in an inflow of cash, indicating that money is entering the company. This inflow is reflected in the company’s cash flow statement, which is an essential component of its financial statements, showing how changes in the balance sheet and income affect cash and cash equivalents.
On a cash flow statement, cash inflows and outflows are divided into three main categories: operating activities, investing activities, and financing activities. The collection of account receivables falls under operating activities because it's tied to the primary revenue-generating activities of a business. It is a typical activity for businesses that offer goods or services on credit.
Understanding how cash inflows and outflows affect a company’s liquidity is crucial for evaluating its financial health. Businesses strive to maintain a positive cash flow from operating activities, meaning that they are generating more cash from their core business operations than they are spending.