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In a review of your income statement you are amazed to see a 25% increase over last month's sales! Your CEO though, is concerned about the lack of cash in your checking account How would you explain this situation using the direct method? Even though our sales was up by 25% that is on the accrual basis. Since those customers have net 30 terms, so we only collected based on the previous month's sales. By next month, our cash flow should be back on track. We had lots of expenses this month with the higher sales, so we had to borrow money.I will have accounts payable hold some payments until we receive more cash. Even though our sales was up by 25% since the customers are delinquent on their payments we are going to have cash flow problems. It is the accounts receivable department not doing their job.

Problemas

In a review of your income statement you are amazed to see a 25% increase over last month's sales! Your CEO though, is concerned about the lack of cash in your checking account How would you explain this situation using the direct method? Even though our sales was up by 25% that is on the accrual basis. Since those customers have net 30 terms, so we only collected based on the previous month's sales. By next month, our cash flow should be back on track. We had lots of expenses this month with the higher sales, so we had to borrow money.I will have accounts payable hold some payments until we receive more cash. Even though our sales was up by 25% since the customers are delinquent on their payments we are going to have cash flow problems. It is the accounts receivable department not doing their job.

In a review of your income statement you are amazed to see a 25% increase over last month's sales! Your CEO though, is concerned about the lack of cash in your checking account How would you explain this situation using the direct method? Even though our sales was up by 25% that is on the accrual basis. Since those customers have net 30 terms, so we only collected based on the previous month's sales. By next month, our cash flow should be back on track. We had lots of expenses this month with the higher sales, so we had to borrow money.I will have accounts payable hold some payments until we receive more cash. Even though our sales was up by 25% since the customers are delinquent on their payments we are going to have cash flow problems. It is the accounts receivable department not doing their job.

Solución

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Juanmaestro · Tutor durante 5 años
expert verifiedVerificación de expertos
4.4 (272 votos)

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Even though our sales was up by \(25\%\) that is on the accrual basis. Since those customers have net 30 terms, so we only collected based on the previous month's sales. By next month, our cash flow should be back on track.<br /><br />This explanation highlights that the increase in sales is recorded on an accrual basis, meaning revenue is recognized when earned, not necessarily when cash is received. The lack of cash is due to the timing of collections from customers who have net 30 payment terms, meaning they pay 30 days after the sale.
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