Which of the following will decrease cash flow?Accounts receivable increaseAccounts payable increaseDepreciation expense increasesTax rates decreaseInitial investment decreases
Question
Which of the following will decrease cash flow?Accounts receivable increaseAccounts payable increaseDepreciation expense increasesTax rates decreaseInitial investment decreases
Solution
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Accounts Receivable Increase: This will decrease cash flow. When accounts receivable increase, it means that more customers are buying goods or services on credit, rather than paying cash. Until the customers pay their bills, the company has a claim to cash, but not the cash itself. Therefore, an increase in accounts receivable decreases cash flow.
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Accounts Payable Increase: This will increase cash flow. When accounts payable increase, it means the company is buying more goods or services on credit, rather than paying cash. This delays the outflow of cash, thereby increasing cash flow.
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Depreciation Expense Increases: This will increase cash flow. Depreciation is a non-cash expense. Even though it reduces net income, it does not involve an outflow of cash. Therefore, an increase in depreciation expense increases cash flow by reducing the amount of taxes a company has to pay.
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Tax Rates Decrease: This will increase cash flow. When tax rates decrease, a company has to pay less tax. This means it gets to keep more of its earnings, which increases cash flow.
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Initial Investment Decreases: This will increase cash flow. The initial investment is an outflow of cash. Therefore, a decrease in the initial investment means less cash is flowing out, which increases cash flow.
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