On October 1, Year 1, Gomez Company collected $24,000 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)$6,000; $6,000
B)$24,000; $24,000
C)$6,000; $24,000
D)$0; $24,000

Question

Quizplus · Accepted Answer

Under the accrual basis of accounting, revenue should be recognized when earned, which means when the service is actually provided, regardless of when the payment is received. Therefore, only the revenue earned from October 1 to December 31 (3 months) should be recognized in Year 1, which is one-fourth of the total amount collected in advance:

$24,000 / 4 = $6,000

So the answer is C.

As for the net cash flows from operating activities, the company received $24,000 in advance, but only earned $6,000 in revenue in Year 1. This means that $18,000 is still unearned and should be recognized as a liability on the balance sheet. The $24,000 received in advance is reported as an inflow of cash from operating activities, but only $6,000 of it is revenue earned, which is reported as an outflow of cash from operating activities. Therefore, the net cash flow from operating activities for Year 1 is:

$24,000 (inflow) - $6,000 (outflow) = $18,000

So the answer is also C.

On October 1, Year 1, Gomez Company Collected $24,000 in Advance