Final answer:
Matthew Company would recognize $1,600 in Service Revenue for Year 1 as it corresponds to 8 months of the provided service within the year. The Cash Flow from Operating Activities would be reported as $2,400, representing the total cash received.
Step-by-step explanation:
When Matthew Company collected $2,400 cash for services on May 1 of Year 1 to be provided over one year, the recognition of revenue must comply with the accrual principle of accounting. This principle dictates that revenue should be recognized when earned, regardless of when cash is received. Since the fiscal year ends on December 31 and the service is provided throughout the year, we need to prorate the revenue recognition for Year 1.
From May 1 to December 31, there are 8 months in Year 1 during which the service is provided. Therefore, for Year 1 financial statements, we would recognize:
- Service Revenue for 8 months, which is 8/12 of the total $2,400, equaling $1,600.
- Cash Flow from operating activities, which remains the full amount collected, $2,400, since this reflects actual cash transactions.
Thus, the correct answer to the question would be:
- Service Revenue: $1,600
- Cash Flow from Operating Activities: $2,400
This reflects that revenue is recognized as it is earned over the period, while cash flow is reported as it occurs.