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DCFHard

Walk me through a DCF analysis from start to finish.

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Accounting
Medium
Pro

Why does an increase in accounts receivable hurt cash flow?

Answer

AR going up means the company booked revenue (and bumped net income) without actually collecting the cash, the customer still owes the money. Because operating cash flow starts from net income and adjusts for working capital changes, the increase in AR is subtracted back out, since the corresponding cash hasn't yet arrived. In effect, you've extended credit to the customer.

Why interviewers ask this

Anything that ties up cash in the operating cycle (rising AR, rising inventory) is a use of cash; anything that delays a cash outflow (rising AP, rising accruals) is a source of cash. For AR specifically, the cleanest way to explain is that revenue is recognized on the income statement immediately, but the cash hasn't arrived, so the cash flow statement subtracts the increase to reconcile. Mention 'days sales outstanding' if you want to sound like you've worked through real models.

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