Module I· Three-Statement Mechanics & LinkagesAdvanced
Question
AR rises by 100 (a cash sale would have been +100 cash) — how do the 3-statement effects differ?
Answer
Mechanics
Identical net income can lead to a massively different cash effect. Compare a cash sale vs. a sale on credit (30% taxes in each case):
Scenario A — sale for cash 100
Income statement
| Item | Δ |
|---|---|
| Revenue | +100 |
| Net income | +70 |
Cash flow
| Item | Δ |
|---|---|
| Net income | +70 |
| Δ NWC | 0 |
| = OCF | +70 |
Balance sheet
| Account | Δ |
|---|---|
| Cash | +70 |
| Retained earnings | +70 |
Scenario B — sale on credit (AR +100)
Income statement
| Item | Δ |
|---|---|
| Revenue | +100 |
| Net income | +70 |
Cash flow
| Item | Δ |
|---|---|
| Net income | +70 |
| Δ AR (in NWC) | −100 |
| = OCF | −30 |
Balance sheet
| Account | Δ |
|---|---|
| AR | +100 |
| Cash | −30 |
| Retained earnings | +70 |
Deep diveShow more details
Key point
Identical net income (+70 in both scenarios), but a 100-point difference in the cash effect. This is exactly why growth companies with long payment terms often run into liquidity squeezes despite high profitability — and why DSO monitoring (days sales outstanding) is a standard DD item.