Recall our income statement from the lemonade stand. Previously we assumed all sales were cash sales; now let’s assume that out of $100 in revenues generated by the lemonade stand in 2007, $50 were in cash and the rest on credit.
Since the company’s accounts receivable increased by $50 during the year (you sold $50 of lemonade on credit), we know that credit sales had a negative cash flow impact as they increased the accounts receivable balance instead of cash. Accordingly, increase in accounts receivable of $50 during the year must be subtracted from net income (Exhibit 7.8) on the cash flow statement in order to accurately depict the amount of cash generated by the company’s operations.