How do accounts receivable and accounts payable affect cash flow?

How do accounts receivable and accounts payable affect cash flow?

• A. AR accelerates inflows; AP delays outflows; both improve liquidity timing.
• B. AR delays inflows; AP accelerates outflows; both improve liquidity timing.
• C. AR delays inflows; AP delays outflows; both affect liquidity timing.
• D. AR delays inflows; AP accelerates outflows; both affect liquidity timing.

Answer: (C)

Timing of cash receipts and payments drives liquidity. When customers are billed on credit, the cash isn’t received immediately, so accounts receivable delays cash inflows and reduces near-term liquidity. On the other hand, when you delay paying suppliers, accounts payable keeps cash in the business longer, delaying cash outflows and improving short-term liquidity. Together, these timing effects shape the cash conversion cycle: AR determines when cash comes in, AP determines when cash goes out, and both influence how much cash is available at any moment.

Timing of cash receipts and payments drives liquidity. When customers are billed on credit, the cash isn’t received immediately, so accounts receivable delays cash inflows and reduces near-term liquidity. On the other hand, when you delay paying suppliers, accounts payable keeps cash in the business longer, delaying cash outflows and improving short-term liquidity. Together, these timing effects shape the cash conversion cycle: AR determines when cash comes in, AP determines when cash goes out, and both influence how much cash is available at any moment.