Question

Assume a firm generates 2,000 in sales and has a500 increase in accounts receivable during an accounting period. Based solely on this information, cash flow will increase by:

1) Cannot be determined
2) Decrease
3) Increase
4) Remain the same

Answer 1

Cash flow will increase based on the information provided.

Step-by-step explanation:

Based on the information provided, cash flow will increase.

Accounts receivable is an asset account that represents the amount of money owed to the firm by its customers for goods or services provided on credit. When accounts receivable increases, it means the firm has made sales but has not yet received the cash. Therefore, even though the firm's cash balance has not changed, the sales generated will eventually lead to an increase in cash flow once the accounts receivable is collected.

In this case, the firm generated $2,000 in sales and experienced a $500 increase in accounts receivable. This means that the firm has made sales of $2,000 but has not received the cash yet, resulting in an increase in accounts receivable by $500. Once the customers pay their debts, the firm will receive the cash, thereby increasing its cash flow.