Exercise-6 (Cash received from customers – formula approach)

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 2016. For this purpose, the following information has been extracted from the trial balance of the company.

• Accounts receivable on December 31, 2015: $62,000
• Accounts receivable on December 31, 2016: $70,000
• Allowance for doubtful accounts on December 31, 2015: $2,100
• Allowance for doubtful accounts on December 31, 2016: $3,200
• Sales for the year 2015: $155,300
• Sales for the year 2016: $126,500

The company sells goods on credit. For the year 2016, 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 2016.

Solution:

*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 increased during the period.

Exercise-6(b):

The following information belongs to Western company:

• Accounts receivable on December 31, 2015: $90,000
• Accounts receivable on December 31, 2016: $75,000
• Allowance for doubtful accounts on December 31, 2015: $3,550
• Allowance for doubtful accounts on December 31, 2016: $4,100
• Sales for the year 2015: $225,300
• Sales for the year 2016: $346,500

The bad debts expense was $7,800 and write-offs totaled to $7,250 during the year 2016. All sales are made on credit.

Required: Compute total amount of cash received from customers by Western company during the year 2016.

Solution:

*(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.