BUSINESS ADMINISTRATION
FINANCIAL ACCOUNTING
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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decreases an asset $1, 500; decreases a liability $1, 500.
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decreases a liability $1, 500; increases owner’s equity $1, 500.
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increases an asset $1, 500; decreases a liability $1, 500.
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increases an asset $1, 500; decreases an asset $1, 500.
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Detailed explanation-1: -No, collection of accounts receivable does not increase total assets. Cash is received upon the collection of accounts receivable. Therefore, there is an increase in cash and a decrease in accounts receivable.
Detailed explanation-2: -How would cash collected on accounts receivable affect the balance sheet? When it collects cash against its A/R balance, a company is converting the balance from one current asset to another. Its A/R balance decreases, while its cash balance increases. Liabilities and equity remain unchanged.
Detailed explanation-3: -Since an increase in A/R signifies that more customers paid on credit during the given period, it is shown as a cash outflow (i.e. “use” of cash) – which causes a company’s ending cash balance and free cash flow (FCF) to decline.
Detailed explanation-4: -Accounts receivable is a current asset that results when a company reports revenues from sales of products or the providing of services on credit using the accrual basis of accounting. The effect on the company’s balance sheet is an increase in current assets and an increase in owner’s or stockholders’ equity.