Qtopia Company uses the direct method to prepare its statement of cash flows. It has reported sales revenues of $100,000 on its income statement for the year 2012. If the balance in accounts receivable has gone up by $4,000 during the year, then $4,000 will have to be added to $100,000 to calculate collections from customers.

Question

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If the direct method is used to prepare the statement of cash flows, collections from customers are calculated as a change in accounts receivable during the period. Therefore, $100,000 should be subtracted by $4,000 (increase in accounts receivable) to get the correct amount of cash collections from customers which is $96,000.

Qtopia Company Uses the Direct Method to Prepare Its Statement