Question

The income statement and a schedule reconciling cash flows from operating activities to net income are provided below for Mike Roe Computers.

MIKE ROE COMPUTERS Income Statement For the Year Ended December 31, 2021 ($ in millions)
Sales				$	150.20
Cost of goods sold					(90.00	)
Gross margin					60.20
Salaries expense	$	18.20
Insurance expense		12.00
Depreciation expense		4.50
Interest expense		5.50			(40.20	)
Gains and losses:
Gain on sale of equipment					11.00
Loss on sale of land					(2.00	)
Income before tax					29.00
Income tax expense					(14.50	)
Net income				$	14.50

Reconciliation of Net Income to Net Cash Flows from Operating Activities ($ in millions)
Net income	$	14.50
Adjustments for noncash effects:
Decrease in accounts receivable		4.50
Gain on sale of equipment		(11.00	)
Increase in inventory		(5.50	)
Increase in accounts payable		8.50
Increase in salaries payable		2.50
Depreciation expense		4.50
Decrease in bond discount		2.75
Decrease in prepaid insurance		2.00
Loss on sale of land		2.00
Increase in income tax payable		5.50
Net cash flows from operating activities	$	30.25

Required:
1. Provide the summary journal entries which shows the cash flow for each of the following for Mike Roe Computers during the reporting period: (a) received from customers, (b) paid to suppliers, (c) paid to employees, (d) paid for interest, (e) paid for insurance, (f) paid for income taxes.
2. Prepare the cash flows from operating activities section of the statement of cash flows (direct method).

Answer 1

Solution 1:

Computation of cash received from customers
Particulars	Amount (In millions)
Sales	$150.20
Add: Decrese in receivables	$4.50
Cash received from customers	$154.70
Computation of cash paid for inventory
Particulars	Amount (In millions)
Cost of goods sold	$90.00
Add: Increase in inventory	$5.50
Less: Increase in accounts payable	$8.50
Cash paid to supplier for inventory	$87.00
Computation of cash paid to employees
Particulars	Amount (In millions)
Salaries expense	$18.20
Add: Increase in Salaries payable	$2.50
Cash paid to employees	$15.70
Computation of cash paid for Interest
Particulars	Amount (In millions)
Interest expense	$5.50
Less: Decrease in bond discount	$2.75
Cash paid for interest	$2.75
Computation of cash paid for Insurance
Particulars	Amount (In millions)
Insurance expense	$12.00
Less: Decrease in prepaid insurance	$2.00
Cash paid for insurance	$10.00
Computation of cash paid for Income Tax
Particulars	Amount (In millions)
Income tax expense	$14.50
Less: Increase in income tax payable	$5.50
Cash paid for income tax	$9.00

Solution 2:
Mike Roe Computers
Statement of Cash Flows (Direct Method) (Partial)
For Year Ended December 31, 2021
Particulars	Amount (In millions)
Cash Flows from operating activities:
Cash received from customers	$154.70
Less: Cash disbursement:
Cash paid to supplier for inventory	-$87.00
Cash paid to employees	-$15.70
Cash paid for interest	-$2.75
Cash paid for insurance	-$10.00
Cash paid for income taxes	-$9.00
Net Cash provided by operating activities	$30.25