Question

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

MIKE ROE COMPUTERS Income Statement For the Year Ended December 31, 2018
Sales				$	148.40
Cost of goods sold					(89.20	)
Gross margin					59.20
Salaries expense	$	18.40
Insurance expense		11.40
Depreciation expense		4.20
Interest expense		5.20			(39.20	)
Gains and losses:
Gain on sale of equipment					10.40
Loss on sale of land					(1.40	)
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
Net income	$	14.50
Adjustments for noncash effects:
Decrease in accounts receivable		4.20
Gain on sale of equipment		(10.40	)
Increase in inventory		(5.20	)
Increase in accounts payable		8.20
Increase in salaries payable		2.20
Depreciation expense		4.20
Decrease in bond discount		2.60
Decrease in prepaid insurance		1.20
Loss on sale of land		1.40
Increase in income tax payable		5.20
Net cash flows from operating activities	$	28.10

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

Answer 1

SOLUTION

A. Journal entries-

S.No.	Account titles and Explanation	Debit ($)	Credit ($)
1.	Cash (received from customers)	152.60
	Accounts Receivable		4.20
	Sales Revenue		148.40
2.	Cost of Goods Sold	89.20
	Inventory	5.20
	Accounts Payable		8.20
	Cash (paid to suppliers of goods)		86.20
3.	Salaries Expense	18.40
	Salaries Payable		2.20
	Cash (paid to employees)		16.20
4.	Interest Expense	5.20
	Discount on Bonds Payable		2.60
	Cash (paid for interest)		2.60
5.	Insurance Expense	11.40
	Prepaid Insurance		1.20
	Cash (paid for insurance)		10.20
6.	Income Tax Expense	14.50
	Income Tax Payable		5.20
	Cash (paid for income taxes)		9.30

(B) Cash flows-

	Amount ($)
Cash Flows from Operating Activities:
Cash received from customers	152.60
Cash paid to suppliers	(86.20)
Cash paid to employees	(16.20)
Cash paid for interest	(2.60)
Cash paid for insurance	(10.20)
Cash paid for income taxes	(9.30)
Net Cash Flows from Operating Activities	28.10