Cash collections ?

CFA Level II
#1

Accounting is not my strong suit so the ?'s about cash collections, accts rec, payable, etc seem counter intuitive. For example: AIG reports '07 revenue of 14.3 BB. During 2007 accts rec rose by .7 BB, accts payable increased by 1.1 BB, and unearned revenue increased by .5 BB. Cash collection from customers was?? Thought process on this would be appreciated. Thanks.

#2

14.3 minus the increase in AR = 13.6BB

#3

I do not know anything about the question but I will take a run at it…I will try and simplify it too. Think accrual. 14.3 in revenue. Did they collect all that in cash? No, because they AR rose by .7 So subtract .7 from 14.3 = 13.6 Now, AP increased. what does that mean? Well they held off paying some bills (e.g. accrued them) but paying or not paying cash to suppliers does not affect cash from customers so ignore it Now unearned revenue increased by .5 what does that mean. Well customers paid them money but they have not been able to recognize the revenue. So that’s cash from customers. Add it The answer should be 14.1

#4

I was just thinking i needed to add 0.5 to my answer… good call Thecodont

#5

Nice explanation, thanks codont.

#6

Cash Collections = Revenue + decrease ( - increase ) in A/R + increase in unearned revenue ( - decrease in unearned revenue ). This might include securitize, if you securitize A/R, then you deduct it off Cash Collections. Accrual = revenue + increase in A/R ( - decrease in A/R) + decrease in unearned revenue ( - increase in unearned revenue )

#7

Also, you need to deduct write-offs (allowances for bad debt) from the formula above

#8

I find this more intuitive to think about in terms of sales (ie. revenue): Sales = Cash collections + increase in A/R - increase in unearned revenue. So your sales equals any cash you’ve collected, plus anything you’ve sold but haven’t collected on, minus anything you’ve collected on but haven’t delivered upon. Good luck everyone! Keep studying.

#9

It should be 15.2… no?

#10

14.1. codont’s explanation is helpful.

#11

That’s a good one. I confused this with the direct method of computing cash flow…here it’s only cash collecetd *from customers*.