The following items were reported on the balance sheets and income statement for Kensington Co.: What amount would be reported in the operating activities section of the statement of cash flows for collections from customers under the direct method assuming that all sales are on credit?

Question

The following items were reported on the balance sheets and income statement for Kensington Co.:  What amount would be reported in the operating activities section of the statement of cash flows for collections from customers under the direct method assuming that all sales are on credit?

Quizplus · Accepted Answer

Collections from customers are related to revenue recognized, which is reported on the income statement. The income statement shows revenue of $857,000. Under the direct method of preparing the statement of cash flows, only cash transactions are reported. Therefore, we must adjust revenue for non-cash items such as changes in accounts receivable. However, since we are assuming that all sales are on credit, there are no adjustments necessary. Therefore, the amount reported in the operating activities section of the statement of cash flows for collections from customers is also $857,000.

The Following Items Were Reported on the Balance Sheets and Income