Chapter 12, Problem 3E

1.

To determine

To show: The journal entries to record the transactions.

Explanation of Solution

Prepare journal entries.

Journal: Journal is the method of recording monetary business transactions in chronological order. It records the debit and credit aspects of each transaction to abide by the double-entry system.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Cash		$325
	Service revenue			$325
	( To record the cash earned by providing service)

Table (1)

• Cash is an asset account and it has increased the value of assets by $325. Hence, it is debited.
• Service revenue is a component of stock holders’ equity and it increases the stock holders’ equity by $325. Hence, it is credited.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Salaries and wagesexpense		$85
	Cash			$85
	( To record the salaries and wages expense payable  )

Table (2)

• Salary and wage expense is a component of stockholders’ equityand it decreases the stock holders’ equity by $85. Hence, it is debited.
• Cash is an asset account and it decreases the value of assets by $85. Hence, it is debited.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Salaries and wagespayable		$15
	Cash			$15
	( To record the salaries and wages expense payable)

Table (3)

• Salary and wage payable is a liabilitythat was payable at the end of previous month, which is currently being paid. Hence, it is debited by $85.
• Cash is an asset account and it decreases the value of assets by $15. Hence, it is debited.

2.

To determine

the amount that should be reported as net cash flow from operating activities.

Answer to Problem 3E

There has been a $225 increase in cash that must be reported as net cash flow from operating activities.

Explanation of Solution

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Determine the amount of total operating cash inflows and total operating cash outflows.

$\begin{array}{c}\text{Total operating cash inflows}=\$325\\ \text{Total operating cash outflows}=\left(\begin{array}{l}\text{Salary and }\\ \text{wage expense}\end{array}\right)+\left(\begin{array}{l}\text{Salary and }\\ \text{wage payable}\end{array}\right)\\ =\$85+\$15\\ =\$100\end{array}$ (1)

Determine the amount net cash flow from operating activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flow from }\\ \text{operating activities}\end{array}\}=\left(\begin{array}{l}\text{Total operating}\\ \text{ cash inflows }\left(1\right)\end{array}\right)-\left(\begin{array}{l}\text{Total operating }\\ \text{cash outflows }\left(1\right)\end{array}\right)\\ \text{= }\$325-\$100\\ =\$225\end{array}$

3.

To determine

The amount that should be reported as net income.

Answer to Problem 3E

The reported amount of net income is $240.

Explanation of Solution

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\left\{\text{Total revenues}\left(\begin{array}{l}\text{Service }\\ \text{revenue}\end{array}\right)\right\}-\left\{\text{Total expenses}\left(\begin{array}{l}\text{Salary and }\\ \text{wage expense}\end{array}\right)\right\}\\ \text{=}\$325-\$85\\ =\$240\end{array}$

4.

To determine

To show: how the indirect method would convert net income to net cash flow from operating activities.

Explanation of Solution

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Company
Statement of Cash Flows – Indirect Method
For the year ended December 31,
Particulars	Amount
Cash flow from operating activities:
Net Income	$240
Less: Decrease in salaries and wages payable	($15)
Net cash flow from operating activities	$225

Table (4)

5.

To determine

To explain: the general rule about converting net income to operating cash flows is revealed in requirement 4.

Explanation of Solution

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

As per requirement 4, the general rule states that subtract the items, when there is a decrease in liabilities (salary and wage payable)from net income to convert itinto cash flows from operating activities.