Because the decrease in current assets is added to cash flow from operating activities.

Explanation of Cash Flow from Operating Activities

Cash flow from operating activities is a section in cash flow statement that shows the amount of cash generated or used in the normal course of business operations. This section is important as it helps investors and analysts to determine the actual cash generated by the company's operations.

Addition of Decrease in Trade Receivable or Bills Receivable

When calculating cash flow from operating activities, the decrease in trade receivable or bills receivable is added to operating profit. This is because the decrease in these items indicates that the company has collected more cash from customers than it has reported as revenue in the income statement. This means that the cash generated from these sales has not been realized in the income statement. Therefore, adding the decrease in trade receivable or bills receivable to operating profit helps to reconcile the cash generated from sales with the revenue reported in the income statement.

Example

For example, if a company has a net profit of $100,000 and a decrease in trade receivable of $20,000, the cash flow from operating activities will be calculated as follows:

Operating profit = Net profit + Depreciation + Amortization
Operating profit = $100,000 + $10,000 + $5,000
Operating profit = $115,000

Cash flow from operating activities = Operating profit + Decrease in trade receivable
Cash flow from operating activities = $115,000 + $20,000
Cash flow from operating activities = $135,000

Conclusion

In conclusion, the decrease in trade receivable or bills receivable is added to operating profit when calculating cash flow from operating activities to reconcile the cash generated from sales with the revenue reported in the income statement. This helps investors and analysts to determine the actual cash generated by the company's operations.