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Does an increase in the interest receivable increase cash flows from operations relative to net income?

Does an increase in the interest receivable increase cash flows from operations relative to net income?

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Answer #1

Soliution:

Interest receivable is a current asset and as we know any amount of increase in a current asset would lead to a decrease in cash flow and similarly any decrease in current asset would lead to a increase in cash flow. The reason being that when the amount tied up in current assets has increased cash to be received has also increased hence more investment in working capital and therefore a cash outflow, however when the amount tied up in current assets has decreased this means that cash has been received and therefore a cash inflow.

So, Increase in interest receivable would decrease cash flows relative to net income.

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