Question

Which of the following activities increase the cash balance on the balance sheet?

a) Purchasing inventory on credit
b) Paying off a long-term loan
c) Collecting accounts receivable
d) Accruing expenses

Answer 1

The only activity listed that increases the cash balance on the balance sheet is collecting accounts receivable, as it converts credit sales into cash, adding to the company's cash balance.

Step-by-step explanation:

The activity that increases the cash balance on the balance sheet is c) Collecting accounts receivable. When a company collects money that it is owed from its customers who previously bought goods on credit, this increases its cash balance.

In contrast, purchasing inventory on credit, paying off a long-term loan, and accruing expenses do not increase the cash balance since they involve either no immediate cash movement or an outflow of cash.

Examples of Impact on Cash Balance

• Purchasing inventory on credit results in an increase in inventory and accounts payable (liabilities), leaving the cash balance unchanged.
• Paying off a long-term loan decreases both cash and long-term liabilities.
• Collecting accounts receivable increases cash and decreases accounts receivable.
• Accruing expenses increases liabilities without affecting the cash balance until the payment is made.