Calculation cash collections in direct method following, 400, currently, Insurance

suxiaoxiao

I'm currently attempting the Qbank questions based on book 3.
This is the question i'm attempting:

Murray Company reported the following revenues and expenses for the year ended 2007:

Sales revenue: $200,000
Wage expense: 89,000
Insurance expense: 17,000
Interest expense: 10,400
Depreciation expense: 50,000

Following are the related balance sheet accounts

Unearned revenue
2007: $15,600
2006: $13,200

Wages payable
2007:5,400
2006:6,600

Prepaid insurance
2007:1,200
2006:0

Interest payable
2007:500
2006:1,600

Accumulated depreciation
2007:95,000
2006:45,000
Cash collections Cash Expenses
A) $202,400 $119,900
B) $202,400 $58,100
C) $197,600 $119,900

I choose C however the ans is A


The answer from Qbank: cash collections = 200,000 + (156,000 - 132,000)

Since the receivables from 2006 to 2007 has an increase of 156000-132000 = 2400, i thought we should deduct from the sales since it is increase in assets which is consider as outflow of cash.

Why is it that the 2400 must be added to the sales for this case?

Thanks



Edited 1 time(s). Last edit at Monday, October 4, 2010 at 12:15PM by vitalstrike82.

dmar

i forget to add the 1 more line:

it states: Calculate cash collections and cash expenses

draz

The account is unearned revenue, not accounts receivable. You have an increase in a liability account (not an asset) and the offset is an increase in cash. Basically they paid for goods or services which won't be recieved until a future year.

suyash1989

SpyAli Wrote:
-------------------------------------------------------
> I beg to differ with your last line Super 1.
> Unearned revenue is the cash that you have
> received in advance for the services which you are
> still due to offer. So that's why it will be
> treated as a liability account.


You're right of course, and I wasn't clear. " They" paid meaning the customers paid

waldziuchna

oh thanks everyone for the advice. i mistaken unearned revenue as account receivables.

Thanks for shedding the light..