An increase in Accounts Receivable by 10 affects cash and net income how?

An increase in Accounts Receivable by 10 affects cash and net income how?

• A. Net Income increases by 6 and cash increases by 4
• B. Net Income increases by 6 and cash decreases by 4
• C. Net Income decreases by 6 and cash decreases by 4
• D. Net Income unchanged and cash unchanged

Answer: (C)

An increase in Accounts Receivable shows sales recorded on credit, so cash collected in the period is not yet realized. That creates a cash flow impact and can also involve non-cash adjustments that affect net income. In this scenario, the AR rise of 10 is reflected as a cash outflow of 4 (cash receipts are still lagging), while the remaining 6 is accounted for as a non-cash expense that reduces reported profit (for example, an increase in the allowance for doubtful accounts). So cash decreases by 4 and net income decreases by 6. Other options imply either an increase or no change in cash or net income, which doesn’t align with the effect of higher receivables tying up cash and potentially driving non-cash expense adjustments.

An increase in Accounts Receivable shows sales recorded on credit, so cash collected in the period is not yet realized. That creates a cash flow impact and can also involve non-cash adjustments that affect net income. In this scenario, the AR rise of 10 is reflected as a cash outflow of 4 (cash receipts are still lagging), while the remaining 6 is accounted for as a non-cash expense that reduces reported profit (for example, an increase in the allowance for doubtful accounts). So cash decreases by 4 and net income decreases by 6. Other options imply either an increase or no change in cash or net income, which doesn’t align with the effect of higher receivables tying up cash and potentially driving non-cash expense adjustments.