If accounts receivable are increasing faster than net income, other things being equal, net cash flows from operating activities will:
A) increase, so the Quality of Income Ratio will fall.
B) decrease, so the Quality of Income Ratio will fall.
C) increase, so the Quality of Income Ratio will rise.
D) decrease, so the Quality of Income Ratio will rise.

Question

Quizplus · Accepted Answer

Accounts receivable represent sales that have not yet been collected in cash, so if they are increasing faster than net income it means that the company is not collecting its sales revenue as quickly as it is recording it. This suggests a potential quality of income issue, as it may be possible that some of the sales are not collectible. As a result, net cash flows from operating activities will decrease, leading to a lower Quality of Income Ratio.

If Accounts Receivable Are Increasing Faster Than Net Income, Other