T/F when the current assets of a company such as accounts receivable or inventory increase during the year, the increase provides additional cash inflow from operating activities
False. When the current assets of a company, such as accounts receivable or inventory, increase during the year, it does not necessarily provide additional cash inflow from operating activities.
To determine the impact on cash flow, we need to understand the difference between accrual accounting and cash accounting. In accrual accounting, transactions are recorded when they are incurred, regardless of when the cash is received or paid. This means that an increase in accounts receivable or inventory shows up as an asset on the balance sheet, indicating that sales have been made but the cash has not yet been received.
In reality, cash flow from operating activities is determined by changes in working capital, which consists of current assets and current liabilities. The formula for calculating operating cash flow is:
Operating Cash Flow = Cash from Operations - Taxes - Fixed Expenses - Changes in Working Capital
If current assets, such as accounts receivable or inventory, increase during the year, it means more cash is tied up in these assets and is unavailable for use in operating activities. The increase in working capital results in a decrease in cash flow from operating activities.
So, in conclusion, an increase in current assets during the year, such as accounts receivable or inventory, does not provide additional cash inflow from operating activities but rather represents cash that is tied up in the business.