On October 1, Year 1, Gomez Company collected $18,600 in advance from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31, Year 1? How much would the company report as net cash flows from operating activities for Year 1?
A)$4,650; $4,650
B)$18,600; $18,600
C)$4,650; $18,600
D)$0; $18,600

Question

Quizplus · Accepted Answer

The revenue that Gomez Company would report related to this contract for the year ended December 31, Year 1 would be the portion of the $18,600 that is earned during that period. Since the services are to be provided over a one-year period beginning on October 1, Year 1, the portion that is earned during the year ended December 31, Year 1 would be 3/12 or 1/4 of the total amount collected in advance. Therefore, the revenue reported for the year ended December 31, Year 1 would be $4,650 ($18,600 x 1/4).
The net cash flows from operating activities for Year 1 would be the difference between the cash received and the revenue recognized during the year. Since the entire $18,600 was collected in advance, the cash received would be $18,600. However, since only $4,650 of the revenue is recognized in Year 1, the net cash flows from operating activities for Year 1 would be $18,600 - $4,650 = $13,950. Therefore, the only option that correctly represents the revenue and net cash flows from operating activities for Year 1 is choice C.

On October 1, Year 1, Gomez Company Collected $18,600 in Advance