Operating Cash Receipts and Cash Flows

Cash Received from Customers  If all sales are for cash, the amount received from customers equals the sales reported on the income statement. When some or all sales are on account, however, we must adjust the amount of sales for the change in Accounts Receivable. It is often helpful to use account analysis to do this. This usually involves setting up a T-account and reconstructing its major entries, with emphasis on cash receipts and payments. To illustrate, we use a T-account that includes accounts receivable balances for Genesis on December 31, 2010 and 2011. The beginning balance is $40,000 and the ending balance is $60,000. Next, the income statement shows sales of $590,000, which we enter on the debit side of this account. We now can reconstruct the Accounts Receivable account to determine the amount of cash received from customers as follows:

Point: An accounts receivable increase implies that cash received from customers is less than sales (the converse is also true).



Example: If the ending balance of accounts receivable is $20,000 (instead of $60,000), what is cash received from customers? Answer: $610,000

This T-account shows that the Accounts Receivable balance begins at $40,000 and increases to $630,000 from sales of $590,000, yet its ending balance is only $60,000. This implies that cash receipts from customers are $570,000, computed as $40,000 + $590,000 − [?] = $60,000. This computation can be rearranged to express cash received as equal to sales of $590,000 minus a $20,000 increase in accounts receivable. This computation is summarized as a general rule in Exhibit 16B.2. The statement of cash flows in Exhibit 16.7 reports the $570,000 cash received from customers as a cash inflow from operating activities.

EXHIBIT 16B.2 Formula to Compute Cash Received from Customers— Direct Method

Other Cash Receipts  While Genesis’s cash receipts are limited to collections from customers, we often see other types of cash receipts, most commonly cash receipts involving rent, interest, and dividends. We compute cash received from these items by subtracting an increase in their respective receivable or adding a decrease. For instance, if rent receivable increases in the period, cash received from renters is less than rent revenue reported on the income statement. If rent receivable decreases, cash received is more than reported rent revenue. The same logic applies to interest and dividends. The formulas for these computations are summarized later in this appendix.

Point: Net income is measured using accrual accounting. Cash flows from operations are measured using cash basis accounting.