Chapter 12, Problem 5E

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		$200
	Accounts receivable		$100
	Sales revenue			$300
	( To record the sales revenue)

Table (1)

• Cash is an asset account and it has increased the value of assets by $200. Hence, it is debited.
• Account receivable is an asset account and it has increased the value of assets by $100. Hence, it is debited.
• Sales revenue is a component of stock holders’ equity and it increases the stock holders’ equity by $300. Hence, it is credited.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Cost of goods sold		$125
	Inventory			$125
	( To record the value of inventories transferred to production)

Table (2)

• Cost of goods sold is an expense account and a component of stockholders’ equityand it decreases the stock holders’ equity by $125. Hence, it is debited.
• Inventory is an asset account and it decreases the value of assets by $125. Hence, it is credited.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Salaries and wagesexpense		$30
	Cash			$30
	( To record the salary and wage expense being paid )

Table (3)

• Salary and wage expense is a component of stockholders’ equityand it decreases the stock holders’ equity by $30. Hence, it is debited.
• Cash is an asset account and it decreases the value of assets by $30. Hence, it is credited.

Date	Account title / Explanation	Post ref.	Debit	Credit
			Amount	Amount
	Cash		$40
	Salaries and wagespayable			$40
	( To record the salaries and wages expense payable  )

Table (4)

• Cash is an asset account and it increases the value of assets by $40. Hence, it is debited.
• Salary and wage payable is a liabilityand, which will be paid in future. Hence, it is credited by $40.

2.

To determine

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

Answer to Problem 5E

There has been a $170 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.

$\begin{array}{c}\text{Total operating cash inflows }=\$200\left(\text{Sales revenue earned}\right)\\ \text{Total operating cash outflows}=\$30\left(\text{Salary and wage expense paid}\right)\end{array}$ (1)

Determine the amount net cash flow from operating activities.

$\begin{array}{c}\begin{array}{l}\text{Net cash flow from }\\ \text{operating activities}\end{array}\}=\left(\begin{array}{l}\text{Total operating}\\ \text{ cash inflows}\left(1\right)\end{array}\right)-\left(\begin{array}{l}\text{Total operating }\\ \text{cash outflows }\left(1\right)\end{array}\right)\\ \text{= }\$200-\$30\\ =\$170\end{array}$

3.

To determine

The amount that should be reported as net income.

Answer to Problem 5E

Thereported amount of net income is $105.

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 total revenues and total expense.

$\begin{array}{c}\text{Total revenues}=\$300\left(\text{Service revenue}\right)\\ \text{Total expenses}=\left(\begin{array}{l}\text{Cost of }\\ \text{goods sold}\end{array}\right)+\left(\begin{array}{l}\text{Salary and }\\ \text{wage expense}\end{array}\right)\\ =\$125+\$70\\ =\$195\end{array}$ (2)

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\text{Total revenues}-\text{Total expenses}\left(2\right)\\ \text{=}\$300-\$195\\ =\$105\end{array}$

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	$105
Add: Increase in salary and wage payable	$40
Add: Decrease in inventory	$125
Less: Increase in accounts receivable	($100)
Net cash flow from operating activities	$170

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 add the items, when there is a decrease in current assets (inventories) and an increase in current liabilities (salary and wage payable) and subtract increase in current assets (accounts receivables)from net income to convert it into cash flows from operating activities.