Cash Received from Customers (Direct Method Statement of Cash Flows)

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“This video. We re gonna discuss how to calculate cash received from customers when you you re preparing the operating section of the statement of cash flows using the direct so if you remember the whole idea behind the direct method is that when we re doing the operating section. We re actually going to be making a cash basis. Income statement right we ve got our regular income statement and then we re gonna convert all the things on the income statement to the cash basis and so when we convert sales revenue to its cash basis.

We get cash received from customers that sometimes called cash collected from customers cash receipts from customers. But it s all talking about the same thing we re just basically taking sales revenue from the income statement. We re converting it to cash received from customers and we do that by making a couple of adjustments. We re gonna have to look at comparative balance sheet.

And see how the accounts receivable balance. Has changed over time. So if accounts receivable have gone down. If they ve decreased that means our customers are paying us so we re gonna add that to the sales revenue.

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But if we had an increase in account receivable that means we re having credit sales we re not collecting cash we re gonna decrease that okay so the change in accounts receivable it depends on did receive will go up or down from the prior period. If it went as if we went down we had a decrease in receivables. We re gonna add that to sales revenue to get cash received from customers okay now but there s another account that we might have to deal with unearned revenue. If the company has some unearned revenue think about it if they get cash from customers.

But they haven t earned the revenue yet. We re gonna have an increase in unearned revenue. And that s cash received from customers as well. So that should also be added to sales revenue and conversely.

If there s a decrease in unearned revenue. Then we want to be subtracting that okay and sometimes also you see like advances from a customer like they put on a deposit on a car or something like that you could think about that as similar to unearned revenue. Okay so now that we ve got that down let s go with with a sample problem that i made and we ll see if we can calculate cash received from customers. So here.

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We ve got the comparative balance sheet for a company. Okay. We ve got the income statement for the company and then we re gonna put together we want to figure for the operating section. The statement of cash flows.

We want to calculate cash receive from customers and we have enough information here to do that so again. All we re doing in this operating section is we re going to be taking the sales revenue. Okay so and we re going to convert that to a cash. Basis.

Okay that s what s happening so we re gonna take 300000. Actually let me write it in the formulas up. Here so you can see 300000. That s the sales revenue.

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I just take that right out of the income statement. Then we have to look at accounts receivable did it go up or. Down well in. 2021 we had that balance sheet day account.

Receivables 50000 but then went to. 20000 so it went down by 30000. So that s a decrease in account receivable up here. So.

That s actually gonna be added. Okay. Now. Let s see did the company have any unearned revenue that s a liability.

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So we look down. We say okay unearned revenue unearned revenue. So they went from 0. They didn t have any unearned revenue to a hundred and ten thousand so it increased at an increase in unearned revenue of one hundred and ten thousand so what do we have here we have three hundred thousand and sales revenue plus.

The decrease in account receivable of 30 thousand plus. The one hundred and ten thousand dollar increase in unearned revenue. So if you add that together you get four hundred and twenty thousand dollars. So that s the amount of cash that this company collected from customers over the course of this period.

Okay so that s basically what we did was we took the sales revenue. That was computed on an accrual basis and we converted it to cash collected from customers on a cash basis of four ” ..

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