Final Answer:
A decrease in the ACCOUNT RECEIVABLE from the prior period is added to NET INCOME in the OPERATING activities section of the statement of cash flows.
Step-by-step explanation:
In accounting and financial reporting, the statement of cash flows is a crucial document that provides insights into the cash-related activities of a business. The OPERATING activities section of this statement focuses on cash flows from the core business operations.
When there is a decrease in ACCOUNT RECEIVABLE from the prior period, it means that the company has collected more cash from its customers than it recognized as revenue in the income statement. This decrease is added to NET INCOME in the OPERATING activities section to adjust for the non-cash portion of the revenue recognized in the prior period.
The adjustment is necessary because NET INCOME is based on accrual accounting, where revenues are recognized when earned, not necessarily when the cash is received. By adding the decrease in ACCOUNT RECEIVABLE to NET INCOME, the statement of cash flows provides a more accurate representation of the cash generated from the company's core operational activities.
It ensures that the cash flow statement reflects the actual cash inflows and outflows, helping stakeholders assess the liquidity and financial health of the business.
In summary, the adjustment related to ACCOUNT RECEIVABLE in the OPERATING activities section aligns the statement of cash flows with the cash-based reality of a business, offering a more transparent and informative view of its cash flow dynamics.