The Daily Technical #116: What are deferred tax assets (DTAs)?

How to answer "Why are increases in accounts receivable a cash reduction on the cash flow statement?"

February 19, 2025

Good morning. Welcome to the 116th edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF YESTERDAY’S QUESTION
Why are increases in accounts receivable a cash reduction on the cash flow statement?

Increases in accounts receivable appear as cash reductions on the cash flow statement because they reflect revenue not yet received in cash.

The cash flow statement starts with net income, which includes all revenue, not just cash.

Therefore, when accounts receivable increase, it indicates more customers paid on credit.

This requires adjusting net income downward to reflect the actual cash received.

While revenue is recorded following accrual accounting, the cash hasn't been collected, leaving it as receivables on the balance sheet.

Common Mistakes

  1. Overlooking that net income under accrual accounting includes all revenue earned, not just what's received in cash. Remember that the cash flow statement adjusts net income to reflect actual cash movements, which is why adjustments for receivables are necessary.

  2. Forgetting to adjust net income for account receivables on the cash flow statement leads to errors. Always remember that adjustments must be made to reconcile net income with true cash flow, highlighting the importance of changes in working capital.

TL;DR

  • Accounts receivable increases suggest sales made on credit, reducing available cash.

  • Cash flow statement starts with net income, encompassing all revenue, not just cash.

  • Adjust net income downwards for receivables to reflect true cash flow.

  • Uncollected cash is marked as receivables on the balance sheet.

  • Accrual accounting records revenue before cash receipt, necessitating the adjustment.

TODAY’S QUESTION
What are deferred tax assets (DTAs)?

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