Martinez Company uses the direct method to prepare its statement of cash flows. It has reported Sales Revenues of $200,000 on its income statement for the year 2015. If the balance in Accounts Receivable has gone up by $10,000 during the year, then $10,000 will have to be added to $200,000 to calculate collections from customers.

Question

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If the balance in Accounts Receivable has gone up by $10,000, it means that not all sales revenues have been collected during the year. Therefore, the amount of Sales Revenues reported on the income statement is not equal to the amount of cash collected from customers. Instead, the increase in Accounts Receivable needs to be subtracted from Sales Revenues to arrive at the cash received from customers, as per the direct method. Therefore, the correct calculation would be $200,000 - $10,000 = $190,000 collected from customers.

Martinez Company Uses the Direct Method to Prepare Its Statement