Answer:
A) $3,000
Explanation:
Accrual accounting requires that revenue should be recognized only as the earning process is being completed, so in this case, only four months (September, October, November and December) worth of revenue can be recognized as such = $9,000 x 4/12 = $3,000
The remaining $6,000 will be included in the balance as a liability account: unearned revenue.
The complete question is:
Gomez Company collected $9,000 on September 1, Year 1 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 it report as cash flows from operating activities for Year 1?
a. $3,000; $3,000
b. $3,000; $9,000
c. $0; $9,000
d. $9,000; $9,000
Answer:
b. $3,000; $9,000
Explanation:
Items that appear in income statements are the revenues and expenses a company incurs within an accounting period. Revenues are recorded as being earned when a service has been performed to earn it.
In this instance, the $9,000 collected by Gomez company is not recorded as income till it is earned on a monthly basis.
The $9,000 is for services to be rendered for 1 year (12 months). So for each month the amount earned is 9,000/12= $750
For 4 months from September to December the amount earned is 750* 4= $3,000
Cash flow from operations for year 1 will be $9,000. The money will not have to be earned to show up in cash flow from operations. Cash flow from operations shows cash flow from regular business activities. Includes changes in working capital, net income, and non cash expenses.
Money collected for services to be provided is an increase in working capital, so the whole $9,000 will be recorded.
