FRA Question - Can someone help me on this? Thankss

This is a practice question on the 2019 note. My original thought was choice C (+150,000+10,000+4,000), however, the official right answer is B, along with the explanation saying that accounts payable do not affect cash collection. I am really confused since AP is a liability account, an increase in liability isn’t a source of cash?

1. Continental Corporation reported sales revenue of \$150,000 for the current year.
If accounts receivable decreased \$10,000 during the year and accounts payable
increased \$4,000 during the year, cash collections were:

A. \$154,000.
B. \$160,000.
C. \$164,000.

Correct answer is C; \$150,000 sales + \$10,000 decrease in accounts receivable = \$160,000 cash
collections. The change in accounts payable does not affect cash collections.
Accounts payable result from a firm’s purchases from its suppliers. (Module 25.3,
LOS 25.f, 25.g)

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Cash collections means cash received from customers; it has nothing to do with purchases and Accounts Payable.

Simplify the complicated side; don't complify the simplicated side.

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Got you, but what if a decrease in Accounts Payable? Would that mean the company paid cash to its supplier? Would that affect the cash collection?

Thank you so much!

shaojieccu wrote:
Got you, but what if a decrease in Accounts Payable? Would that mean the company paid cash to its supplier?

Yes.

shaojieccu wrote:
Would that affect the cash collection?

No.

If you pay Bob, does that change how much money you received from Mary?

shaojieccu wrote:
Thank you so much!

My pleasure.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/