On January 1, 20X1, Sage Consulting had a cash balance of $20,000. On December 3
ID: 2528445 • Letter: O
Question
On January 1, 20X1, Sage Consulting had a cash balance of $20,000. On December 31, 20X1, its cash balance was $35,000. Its accounts receivable increased from $10,000 to $16,000. Which of the following is true treatment of the increase in the value of accounts receivable while preparing the statement of cash flows using a worksheet approach?
a. The increase in the value of accounts receivable of $6,000 must be debited to accounts receivable and must be deducted in the operating section of the statement of cash flows.
b. The increase in the value of accounts receivable of $6,000 must be debited to accounts receivable and must be added in the operating section of the statement of cash flows.
c. The increase in the value of accounts receivable of $6,000 must be debited to accounts receivable and must be deducted in the investing section of the statement of cash flows.
d. The increase in the value of accounts receivable of $6,000 must be debited to accounts receivable and must be added in the investing section of the statement of cash flows.
Explanation / Answer
Option A is correct answer, Reason being:
Increase in accounts receivable leads to increase in current assets, so it will be debited to accounts receivables account.
Journal Entry will be :
Accounts receivable Dr. $6000
To Party Account $6000
(Being account rec. increase by $6000)
Increase in current assets lead to decrease in cash flow from operating activities, because cash is not flowing in today rather it will be recieved in future, therefore it implies less cash is flowing in.