Which of the following would affect both net income and cash flow from operations?
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A. B. C. D.D
The sale of a marketable security falls under an investing activity. Interest payments fall under financing activities. Credit sale to a customer doesn't apply.
The option that would affect both net income and cash flow from operations is option A: credit sale to a customer.
When a company makes a credit sale to a customer, it means that the company has sold goods or services to the customer on credit, allowing the customer to pay at a later date. Let's break down how this transaction affects both net income and cash flow from operations:
Net Income: A credit sale increases the company's revenue because it represents a sale of goods or services. This increase in revenue is recognized as sales or revenue in the income statement, which increases net income. So, the net income of the company will be positively affected by the credit sale.
Cash Flow from Operations: While the credit sale increases net income, it does not immediately result in cash inflow because the customer has not yet paid for the goods or services. However, the credit sale affects the cash flow from operations section of the statement of cash flows in two ways:
a. Accounts Receivable: The credit sale leads to an increase in accounts receivable, which represents the amount the customer owes to the company for the goods or services. Accounts receivable is an asset account and is recorded as an increase on the balance sheet. However, since the customer has not paid yet, there is no immediate cash inflow. The increase in accounts receivable reduces the cash flow from operations because it represents an increase in non-cash working capital.
b. Bad Debt Expense: There is also a potential impact on the cash flow from operations related to bad debt expense. Bad debt expense represents an estimate of the portion of accounts receivable that the company expects will not be collected. If the credit sale eventually becomes uncollectible, the company will have to record bad debt expense, which reduces net income and cash flow from operations.
In summary, a credit sale to a customer affects both net income and cash flow from operations. It increases net income because it represents a sale of goods or services, but it does not immediately result in cash inflow. Instead, it increases accounts receivable, which reduces cash flow from operations, and it may also impact cash flow if bad debt expense is incurred in the future.