Question

On September 1, Year 1, Gomez Company collected $12,000 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?

Answer 1

Current Year income = $3,960

Cash flow from operating activities = $12,000

Explanation:

The computation of net cash flows from operating activities is shown below:-

Consequently , the amount received was for 12 months of service in order to be allocated over 12 months and in those 12 months 4 months of income related to the current year and 8 months of income related to the following year.

Current Year income = Advance collection from customer × Four months ÷ Total number of months in a year

= $12,000 × 4 ÷ 12

= $3,960

Since the cash is collected in advance from the customer of $12,000 and the same is to be shown in the operating activities section of the balance sheet as a cash inflow

Cash flow from operating activities = $12,000