Gomez Company collected $21,300 on September 1, Year 1 from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would it report as cash flows from operating activities for Year 1?
A) Revenue of $7,100; Cash flow from operating activities of $7,100
B) Revenue of $0; Cash flow from operating activities of $21,300
C) Revenue of $7,100; Cash flow from operating activities of $21,300
D) Revenue of $21,300; Cash flow from operating activities of $21,300

Question

Quizplus · Accepted Answer

According to the revenue recognition principle, revenue should be recognized when earned and when the company has fulfilled its obligations to the customer. In this case, Gomez Company has received $21,300 on September 1, Year 1, for services to be provided over a one-year period beginning on that date. Therefore, Gomez Company would recognize revenue of $7,100 ($21,300 ÷ 3) for the year ended December 31, Year 1 ($21,300 ÷ 3 = $7,100 per four-month period).

Cash flows from operating activities for Year 1 would be $21,300 because it is the amount of cash received from the customer for services to be provided.

Gomez Company Collected $21,300 on September 1, Year 1 from a Customer