Using the Accounts Receivable account, explain how a company may report net inco

Question

Using the Accounts Receivable account, explain how a company may report net

            income on its income statement using the accrual basis but report negative cash flow

            from operating activities on its statement of cash flows using the cash basis. [Hint:

            Assume that you calculate an excess of revenues over expenses (i.e., net income on

            the accrual basis) but your calculation of cash flow from operating activities

            (i.e., the cash basis) produces a negative number. That is, cash is used rather than

            provided. See chapters 1, 4 and 21.]

2. What steps do you recommend be taken to ensure that net cash flow from operating

      activities is positive next year? [Hint: Analyze the Accounts Receivable account.]

Explanation / Answer

1) Below are the explaination

Negative Cash Flow                  

-£1,510,000.00

Income Statement Extract Cash Purchase during the year £ 1,000,000.00 Credit Sales During The Year £ 2,500,000.00 Expenses During the year: Printing & stationary £       10,000.00 Salary £     500,000.00 Depreciation £     100,000.00 Net Profit before tax £     890,000.00 Tax £     178,000.00 Net Profit after Tax £    712,000.00 Cash Flow Extract-Direct Method Cash Paid to Supplier -£ 1,000,000.00 Cash paid for expenses -£    510,000.00

Negative Cash Flow                  

2) If we receive the cash from customers next year then our cash flow may comes in positive subject to next year Purchase and sales.

-£1,510,000.00

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