CMA Study Group

 View Only
  • 1.  Working Capital and Accounts Receivable

    Posted 06-22-2019 10:03 AM

    Steers Company has just completed its pro forma financial statements for the coming year. Relevant information is summarized below.

    Assuming that the increase in working capital was the result of an increase in the Accounts Receivable balance, the increase in Steer's cash account for the coming year will be:

    The increase in working capital is negative because an asset balance increase from Y1 to Y2 yields a cash balance decrease.



    if someone could please explain this it would be great! 
    thanks 



    ------------------------------
    Rituparni Pinisetti
    Student

    ------------------------------


  • 2.  RE: Working Capital and Accounts Receivable

    Posted 06-24-2019 03:35 PM
    Hello Rituparni,

    You would recall in the statement of cash flows: any increase in an asset is the use of cash flow, while a decrease is the generation of cash flow. Also, the increase in a liability is the generation of cash flow, while the decrease is a use of cash flow. You can view the accounts receivable as a "short-term loan to your customers" or less money available to cover the day-to-day operations.

    As depreciation is a non-cash item, it is added to net income to reconcile to cash.

    I hope this explanation helps.


    ------------------------------
    Charmaine Hippolyte-Mack
    Operations & Accounting Manager

    ------------------------------



  • 3.  RE: Working Capital and Accounts Receivable

    Posted 06-27-2019 12:42 PM
    If looking at cash inflow and outflow; 
    Net income is cash inflow so add to cash balance
    Expenditure is cash outflow so subtract to cash balance
    Increase in working capital is the result of account receivable, which means that the company made sale but haven't received the cash, so subtract to cash balance, and
    Depreciation is expense, but it is a non-cash expense, so add to cash balance.


    ------------------------------
    Jenish Desai
    Student
    Stephenville TX
    United States
    ------------------------------