Artist Paints Company uses the direct method for preparing its statement of cash flow. Artist reports the following information regarding 2019:
From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $214,000
Operating Expenses, $33,000
From the balance sheet:
$$\begin{array} { | l | r | r | }
\hline & \text { Beginning Balance } & \text { Ending Balance } \
\hline \text { Accounts Receivable } & \$ 14,800 & \$ 17,900 \
\hline \text { Merchandise Inventory } & 23,700 & 18,500 \
\hline \text { Accounts Payable } & 6900 & 14,000 \
\hline \text { Accrued Liabilities } & 4500 & 2000 \
\hline
\end{array}$$ What amount will be shown for collections from customers?

Question

Artist Paints Company uses the direct method for preparing its statement of cash flow. Artist reports the following information regarding 2019: 
From the income statement:
Sales Revenues, $265,000
Cost of Goods Sold, $214,000
Operating Expenses, $33,000
From the balance sheet:
$$\begin{array} { | l | r | r | } 
\hline & \text { Beginning Balance } & \text { Ending Balance } \
\hline \text { Accounts Receivable } & \$ 14,800 & \$ 17,900 \
\hline \text { Merchandise Inventory } & 23,700 & 18,500 \
\hline \text { Accounts Payable } & 6900 & 14,000 \
\hline \text { Accrued Liabilities } & 4500 & 2000 \
\hline
\end{array}$$ What amount will be shown for collections from customers?

Quizplus · Accepted Answer

To calculate collections from customers using the direct method, we need to start with sales revenue and adjust for changes in accounts receivable. The formula is as follows:
Collections from customers = Sales revenue + decrease in accounts receivable – increase in accounts receivable
Since no information is given about changes in accounts receivable, we can assume it remained the same. Therefore, collections from customers would be equal to sales revenue, which is $265,000. However, the question asks for the amount that will be shown on the statement of cash flows. The direct method shows the actual cash received from customers, not the total amount of sales. Therefore, we need to adjust for any changes in accounts receivable from the previous year. Based on the information given, we do not have enough information to make this adjustment. Therefore, the best choice is to select the closest answer to sales revenue, which is A) $261,900.

Artist Paints Company Uses the Direct Method for Preparing Its