Series 79 practice questionmediumFinancial Statement Analysis
If a company's accounts receivable increases by $2 million and accounts payable increases by $1 million during the year, what is the net impact on cash flow from changes in working capital?
- ADecrease of $3 million
- BIncrease of $3 million
- CDecrease of $1 million✓ Correct answer
- DIncrease of $1 million
Explanation
Why C — Decrease of $1 million
An increase in receivables uses cash (outflow), while an increase in payables provides cash (inflow). The net is -$2 million + $1 million = -$1 million, so cash flow decreases by $1 million. Mistaking both as inflows or outflows leads to errors in cash flow forecasting.
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