The Effect of Accounting Principles on Cash Flow

A

The choice of accounting principles affects only the classification and not the net cash flow, and reducing receivables in considered an increase in operating cash flow.

To determine the correct statements, let's evaluate each option one by one:

I. A company's choice of accounting principles for financial reporting purposes does not affect net cash flow for the accounting period.

This statement is correct. Net cash flow is determined by the actual cash inflows and outflows during a specific accounting period. It represents the difference between cash inflows (such as cash received from customers) and cash outflows (such as payments made to suppliers). Accounting principles affect the way transactions are recorded and presented in financial statements but do not directly impact the actual cash flows.

II. A company's choice of accounting principles for financial reporting purposes does not affect operating cash flow.

This statement is also correct. Operating cash flow is a measure of the cash generated or used by a company's core operations. It is derived from the company's net income adjusted for non-cash expenses and changes in working capital. The choice of accounting principles, such as revenue recognition methods or expense recognition methods, may affect the timing or presentation of revenues and expenses, but they do not alter the actual cash flows generated from operating activities.

III. If a company sells its receivables, this will increase operating cash flow.

This statement is incorrect. When a company sells its receivables, it typically involves transferring the right to collect future cash payments to a third party in exchange for immediate cash. This transaction is known as factoring or accounts receivable financing. Selling receivables affects financing cash flows, not operating cash flows. The cash received from the sale of receivables would be classified as a financing activity because it involves raising cash through a financing arrangement rather than generating cash from the company's core operations.

IV. If a company sells its receivables, this will increase financing cash flow.

This statement is correct. As mentioned above, selling receivables involves raising cash through a financing arrangement. The cash received from the sale of receivables would be classified as a financing activity in the statement of cash flows. Financing cash flow includes transactions related to borrowing or repaying debt, issuing or buying back equity shares, and any other activities that affect the company's capital structure.

Based on the explanations above, the correct statements are:

A. I and III