Bay Company began using the allowance method in 2014. On January 1, 2014, Bay had a $3,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During 2014, Bay provided $25,000 of service on account. The company collected $21,000 cash from account receivable. Uncollectible accounts are estimated to be 2% of sales on account.
The amount of cash flow from operating activities that would appear on the 2014 statement of cash flows is:
A) $24,000.
B) $25,000.
C) $17,000.
D) $21,000.

Question

Quizplus · Accepted Answer

The amount of cash flow from operating activities can be calculated using the following formula:

Cash collected from customers - Cash paid for expenses

Cash collected from customers is determined by adding the beginning balance of Accounts Receivable to the amount of credit sales and then subtracting the ending balance of Accounts Receivable.

Beginning balance of Accounts Receivable = $3,000 
Credit sales = $25,000 
Ending balance of Accounts Receivable = $7,000 ($25,000 - $21,000)

Cash collected from customers = $3,000 + $25,000 - $7,000 = $21,000

There is no information provided regarding the amount of cash paid for expenses, so it is assumed to be zero.

Therefore, the amount of cash flow from operating activities is $21,000.

Bay Company Began Using the Allowance Method in 2014