Accounts Receivable on the 3 Financial Statements (11:19)
What is Accounts Receivable (“AR”)? Why This Question Matters? What happens when AR goes up? What happens when it goes down?
Here’s an outline of what we cover in this free tutorial:
1. Why This Question Matters
This one is both a “real world” scenario, AND a very common question in interviews.
2. What is Accounts Receivable (“AR”)?
Line item on Balance Sheet for cash that you still need to collect from customers.
Recorded it as revenue, but haven’t received the cash payment from them yet (Like an “IOU”).
Sent invoice and delivered product, but still waiting on payment from customer.
(Standards differ a bit by company and industry, but that’s the basic idea)
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3. What happens when AR goes up – record revenue and profit, but no cash received yet… so cash goes down!
Intuition: Recorded paper profit that you haven’t actually gotten in cash yet…
But those taxes you pay on that profit ARE in cash!
So you’re paying extra taxes for profit you don’t have yet, which reduces your cash.
4. What happens when AR then goes down after you’ve collected the cash – no changes on IS, but cash now INCREASES to reflect the collection, AR decreases, and other side balances via Retained Earnings.
Intuition: AR “going down” means a cash collection has taken place… but the revenue, profits, and taxes you’ve recorded don’t change.
So all you do is REMOVE the cash decrease on the CFS…
And cash on the Balance Sheet is now up, with Retained Earnings up on the other side to balance it.