How would an increase in accounts receivable days typically affect cash flow?

How would an increase in accounts receivable days typically affect cash flow?

• A. Increase cash flow due to faster collections.
• B. No significant impact on cash flow.
• C. Decrease cash flow due to slower collections.
• D. Improve collection efficiency overall.

Answer: (C)

An increase in accounts receivable days indicates that it takes longer for a company to collect payments from its customers after a sale has been made. As a result, the company’s cash inflow becomes slower, leading to a decrease in cash flow. When accounts receivable days are longer, this implies that cash is tied up in unpaid invoices for a greater duration, reducing the available cash the company has on hand for operations, investments, and other financial obligations. This extended collection period can impact the company's liquidity and overall financial health, as it may struggle to meet immediate cash needs without sufficient incoming revenue from its accounts receivable. In summary, longer accounts receivable days signify slower collection times, which directly contribute to a decrease in cash flow.

An increase in accounts receivable days indicates that it takes longer for a company to collect payments from its customers after a sale has been made. As a result, the company’s cash inflow becomes slower, leading to a decrease in cash flow. When accounts receivable days are longer, this implies that cash is tied up in unpaid invoices for a greater duration, reducing the available cash the company has on hand for operations, investments, and other financial obligations. This extended collection period can impact the company's liquidity and overall financial health, as it may struggle to meet immediate cash needs without sufficient incoming revenue from its accounts receivable.

In summary, longer accounts receivable days signify slower collection times, which directly contribute to a decrease in cash flow.