On a statement of cash flows, collection of accounts receivable are classified as:
Select one:
a. a financing activity
b. an operating activity
c. a noncash investing and financing activity
d. an investing activity
The correct answer and explanation is:
The correct answer is b. an operating activity.
Explanation:
In the statement of cash flows, the collection of accounts receivable is classified under operating activities. Operating activities refer to the primary revenue-generating activities of the business, such as selling goods or services, as well as other transactions that affect net income. This includes cash inflows and outflows related to the day-to-day operations of the company.
When a company collects accounts receivable, it is essentially converting its credit sales into cash. This is a direct consequence of the company’s primary operations, which is why it falls under the category of operating activities. More specifically, collections from customers are cash inflows that increase the company’s cash balance, which is important for measuring the liquidity and financial health of the business.
It is also important to note that accounts receivable are considered current assets on the balance sheet. As they are collected, the cash balance increases while accounts receivable decrease, but there is no effect on the company’s financing or investing activities. Therefore, collections from accounts receivable are purely an operational cash flow, not related to investments in long-term assets (investing activity) or obtaining funds from shareholders or creditors (financing activity).
To summarize, when a company collects accounts receivable, it affects the cash flow from operations. It does not involve cash flows from financing or investing activities, which is why it is classified as an operating activity in the statement of cash flows. This classification helps provide a clearer picture of the company’s ability to generate cash from its regular business operations.