Question

Suppose your company sells services of $370 in exchange for $205 cash and $165 on account. Required: Prepare the journal entry to record this transaction. Identify the amount that should be reported as net cash flow from operating activities. Identify the amount that would be included in net income. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities (requirement 2).

Answer 1

1. Journal Entry

Date Particulars Debit Credit

Cash $205

Debtors/Party A/c $165

To Service revenue $370

(Being service income recorded)

2. Net cash Flow = $370 - $165

Net cash Flow = $205

3. Calculation of Net Income

Net Income = Service Income - Expenses

Net Income = $370 - $0

Net Income = $370

4. Computation of how the indirect method convert the net income to net cash flow from operating activities

Particulars Amount

Net Income $370

Increase in accounts receivable ($165)

Net cash flow from operating activities $205