Question

If the balances in both accounts receivable and accounts payable decrease during the year

1. the decrease in both the accounts receivable and accounts payable balances will result in a decrease in cash for the period
2. the decrease in both the accounts receivable and accounts payable balances will result in a increase in cash for the period
3. the decrease in the accounts receivable balance would result in an increase in cash for the period
4. the decrease in the accounts payable balance would result in a increase in cash for the period

Answer 1

A decrease in accounts receivable increases cash as customers pay off debts, while a decrease in accounts payable decreases cash as the company pays its own debts.

Step-by-step explanation:

Understanding the impact of changes in accounts receivable and accounts payable on cash flow is essential in business finance. When accounts receivable decrease, this typically indicates that customers are paying off their outstanding debts to the company, which increases the company's cash. Conversely, when accounts payable decrease, the company is paying off its own debts to suppliers, which reduces cash. Thus, a decrease in accounts receivable leads to an increase in cash, while a decrease in accounts payable leads to a decrease in cash. Therefore, the correct answer is: the decrease in the accounts receivable balance would result in an increase in cash for the period, but the decrease in accounts payable balance would not necessarily result in an increase in cash for the period.