Exercise-6(a):

The Alpha company prepares its statement of cash flows using direct method. It requests you to calculate cash received from customers during the year 2015. For this purpose, the follwoing information has been extraced from the trial balance of the company.

Year 2015 Year 2014
Accounts receivable $70,000 $62,000
Allowance for doubtful accounts $3,200 2,100
Sales $126,500 $155,300

The company sells goods on credit. For the year 2015, bad debts expense were $7,500 and accounts amounting to $6,400 were written-off.

Required: Compute cash received from customers to be reported in the statement of cash flows for the year 2015.

Solution:

Cash collected from customers:
Sales 126,500
Deduct: Increase in accounts receivable (net of  write-offs)* 14,400

Cash received from customers 112,100

*Closing balance of accounts receivable – (Opening balance of accounts receivable – Write-offs)
= 70,000 – (62,000 – 6,400) = 14,400

Note: The change in accounts receivable has been deducted from the sales because accounts receivable have increase during the period.

Exercise-6(b):

The follwoing information belongs to Western company.

Year 2015 Year 2014
Accounts receivable $75,000 $90,000
Allowance for doubtful accounts $4,100 3,550
Credit sales $346,500 $225,300

The bad debts expense was $7,800 and write-offs totaled to $7,250 during the year 2015. All sales are made on credit.

Required: Compute total amount of cash received from customers by Western company during the year 2015.

Solution:

Cash collected from customers:
Sales 346,500
Add: Decrease in accounts receivable (net of  write-offs)* 7,750

Cash received from customers 354,250

*(Opening balance of accounts receivable- Write-offs) – Closing balance of accounts receivable
= (90,000 – 7,250)  – 75,000 = 7,750

Note: The change in accounts receivable has been added to the sales because accounts receivable have decreased during the period.

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