Question

1) 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 and were paid for in a previous period. Your company also recorded salaries and wages of $70, of which only $30 has been paid in cash.

Journal Entry:
transaction list
1. Record the sales revenue of $200 for cash and $100 on account and record the cost of goods sold of $125 using one journal entry
2. Record the salaries and wages expense of $70.


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 (requirement 2).

Answer 1

The journal entries involve recording sales, cost of goods sold, and salaries expenses. Net income is calculated by subtracting cost of goods sold and salaries expenses from sales revenue. The indirect method adjusts net income by changes in working capital to calculate net cash flow from operating activities.

Journal Entries and Profit Calculation

To record the sales revenue of $200 for cash and $100 on account, and the cost of goods sold of $125, the journal entry would be:

• Debit Cash $200
• Debit Accounts Receivable $100
• Credit Sales Revenue $300
• Debit Cost of Goods Sold $125
• Credit Inventory $125

To record the salaries and wages expense of $70, the journal entry would be:

• Debit Salaries and Wages Expense $70
• Credit Cash $30
• Credit Salaries and Wages Payable $40

The net income calculation would be:

1. Start with Sales Revenue of $300.
2. Subtract Cost of Goods Sold $125, resulting in Gross Profit of $175.
3. Subtract Salaries and Wages Expense of $70, resulting in Net Income of $105.

To convert net income to net cash flow from operating activities using the indirect method, start with the Net Income of $105.

Add back the non-cash expense (none in this case) and adjust for changes in working capital, which includes the increase in Accounts Receivable of $100 and an increase in Salaries and Wages Payable of $40.

This results in Net Cash Flow from Operating Activities of $45 ($105 - $100 + $40).