Question

Deckers Outdoor Corporation designs and markets footwear under the brand names Teva, UGG, and others. Assume that two recent years produced a combination of declining sales revenue and net income, culminating in a net income of only $5,710 (all numbers in thousands). Yet Deckers was able to report positive cash flows from operations in the current year of $198,677. Contributing to that positive cash flow was the change in accounts receivable. The current and prior year balance sheets reported the following: (dollars in thousands) Current Year Previous Year $ 158,643 $ 160,154 Trade accounts receivable, net of allowances Required: 1. On the current year's cash flow statement (indirect method), how would the change in accounts receivable affect cash flow from operations? 2-a. How does declining sales revenue often lead to declining accounts receivable? 2-b. How does declining sales revenue often lead to cash collections from customers being higher than sales revenue? Complete this question by entering your answers in the tabs below. Reg 1 Req 2A Reg 2B On the current year's cash flow statement (indirect method), how would the change in accounts receivable affect cash flow from operations? (Enter your answers in thousands not in dollars.) thousand Under the indirect method, the would be in the accounts receivable balance of net income to derive cash flow from operations. < Req 1 Req 2A >

Answer 1

Requirement 1

Decrease in Accounts Receivables = Accounts Receivables of Previous Year - Accounts Receivables of Current Year

Accounts Receivables of Current Year = $ 158,643

Accounts Receivables of Previous Year = $ 160,154

Decrease in Accounts Receivables = 160,154 - 158,643 = $ 1,511

Answers for Blanks

1. Decrease

2. $ 1,511

3. Added to

Requirement 2 A

Journal Entry to Record Sales on Account

Accounts Receivable A/C...Dr

To Sales

The above journal entry make clear sense that the Accounts Receivables increases with an increase in the level of sales. It make clear that if the sales revenue on account increase it increases the balance of accounts receivables whereas the decrease in sales revenue will reduce the Accounts Receivables. in the case of deckers corporation the same thing is there the sale Revenue is decreasing due to which the accounts receivables are also decreasing.

Requirement 2B

As the business work in the typical business environment it needs blood in the form of money to keep it hanging and growing. When there is a decrease in sales revenue it also reduces the account receivable but increase cash collection from customsers higher than sales revenue. the reason behind the same is thatbthe business follows a standard period of payment cycle in which debts are to be paid so with the reduction in accounts receivables it is not necessary that cash collection will decline becuase the older debts whose payment has now become will due will pay their debts which will increase the cash collection of the company despite being the low sales revenue.

In the case of deckers corporation due to the collection of old Accounts Receivables the cash collection during the period could be high despite having a low sales revenue level.