Balance sheet accounts for Hollis, Inc. contained the following amounts at the ends of years 1 and 2: The company's income statement for year 2 follows: There were no sales or retirements of plant and equipment in Year 2. Cash dividends of $5,000 were paid during Year 2. The company pays no income taxes. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows.
-For Year 2, sales adjusted to a cash basis would be:
A) $111,000
B) $120,000
C) $126,000
D) $132,000

Question

Balance sheet accounts for Hollis, Inc. contained the following amounts at the ends of years 1 and 2:  The company's income statement for year 2 follows:  There were no sales or retirements of plant and equipment in Year 2. Cash dividends of $5,000 were paid during Year 2. The company pays no income taxes. The company uses the direct method to determine the net cash provided by operating activities on the statement of cash flows.
-For Year 2, sales adjusted to a cash basis would be:
A) $111,000 
B) $120,000 
C) $126,000 
D) $132,000

Quizplus · Accepted Answer

To determine sales adjusted to a cash basis, we need to start with the reported revenue of $130,000 and subtract any increase in accounts receivable and add any decrease in accounts receivable:
Beginning accounts receivable = $12,000 
Ending accounts receivable = $16,000
Change in accounts receivable = $16,000 - $12,000 = $4,000 (increase)
Adjusted sales = $130,000 - $4,000 = $126,000
However, we also need to take into account the fact that cash dividends of $5,000 were paid during Year 2, which would reduce the cash balance. Thus, the actual sales adjusted to a cash basis would be: 
Adjusted sales = $126,000 - $5,000 = $121,000
Therefore, the closest answer is B, $120,000.

Balance Sheet Accounts for Hollis, Inc