Martinez Installations Company uses the direct method to prepare its statement of cash flows.Martinez has reported sales revenues of $200,000 on its income statement for 2017.If the balance in Accounts Receivable has increased by $10,000 during the year,then $10,000 needs to be added to $200,000 to calculate collections from customers.

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The direct method requires calculating cash inflows and outflows from operating activities by adjusting each line item on the income statement based on changes in corresponding balance sheet accounts. The increase in Accounts Receivable indicates that not all sales revenues have been collected in cash during the year, so adding the entire amount of the increase to sales would overstate cash collections from customers. Instead, Martinez Installations Company would need to calculate collections from customers by adjusting sales based on the change in Accounts Receivable, which is a separate calculation.

Martinez Installations Company Uses the Direct Method to Prepare Its