Suppose Your Company sells goods for $300, of which $200 is received in cash and

Question

Suppose Your Company sells goods for $300, of which $200 is received in cash and $100 is on account. the goods cost your company $125 in a previous period. your company also recorded wages of $70 of which only $30 has been paid in cash.

1. Show the journal entries to record these transactions.
2. Calculate the amount that should be reported as net cash flow from operating activities.
3. Calculate the amount that should be reported as net income.
4. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities.
5. what general rule about converting net income to operating cash flows is revealed by your answer to requirement 4?

Explanation / Answer

1 Journal Entries Cash 200.00 Accounts Receivable 100.00 Sales Revenue 300.00 Cost of Goods Sold 125.00 Merchandise inventory 125.00 Wage Expense 70.00 Cash 30.00 Wages Payable 40.00 2 Net Cash from Operating Activities Cash Receipts from sales 200.00 Less :Salary payment -30.00 Net Cash from Operating Activities 170.00 3 Amount to be reported as Net Income Sales 300.00 Less:Cost of Goods sold -125.00 Gross Profit 175.00 Less : Wage Expense -70.00 Net Income 105.00 4 Operating Cash Flow Using Indirect method Net Income 105.00 Add: Increase in payables 40.00 Add: Decrease in inventory 125.00 Less: Increase in Receivables -100.00 Net Cash from Operating Activities 170.00 5 The following generals rule is observed Increase in Current Liabilities increases the cash inflow Increase in Current Assets decreases the cash inflow Decrease in Current Liabilities decreases the cash inflow Decrease in Current Assets increases the cash inflow

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