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resellers. Even the most honest companies in this business cannot avoid making revenue-reporting judgments and must therefore be scrutinized.
2. Check against Cash Collected
The second thing you can do is to check reported revenues against the actual cash received from customers. In the section on cash flow, we see that companies can show cash from operations (CFO) in either the direct or indirect format; unfortunately, almost all companies use the indirect method. A rare exception is Collins Industries:
The virtue of the direct method is that it displays a separate line for "cash received from customers." Such a line is not shown under the indirect method, but we only need three items to calculate the cash received from customers:
(1) Net sales
(2) Plus the decrease in accounts receivable (or minus the increase)
(3) Plus the increase in cash advances from customers
(or minus the decrease) ____________________________________________________________ = Cash received from customers
We add the decrease in accounts receivable because it signifies cash received to pay down receivables. 'Cash advances from customers' represents cash received for services not yet rendered; this is also known as unearned or deferred revenue and is classified as a current liability on the balance sheet. Below, we do this calculation for Collins Industries. You can see that our calculated number (shown under "How to Calculate 'Cash Received from Customers'") equals the reported cash collected from customers (circled in green above):
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