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 Cost of goods sold $148.60 89.30 59.30 Gross margin Salaries expense Insurance expense Depreciation expense Interest expense Gains and losses: $18.60 11.60 4.30 5.30 (39.80) Gain on sale of equipment Loss on sale of land 10.60 (1.60 28.50 Income before tax Income tax expense (14.25) Net income $ 14.25 Reconciliation of Net Income to Net Cash Flows from Operating Activities $ 14.25 Net income Adjustments for noncash effects: Decrease in accounts receivable Gain on sale of equipment Increase in inventory Increase in accounts payable Increase in salaries payable Depreciation expense Decrease in bond discount Decrease in prepaid insurance Loss on sale of land Increase in income tax payable Net cash flows from operating activities 4.30 (10.60) (5.30) 8.30 2.30 4.30 2.65 1.30 1.60 5.30 $ 28.40 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 1:

Computation of cash received from customers
Particulars	Amount (In millions)
Sales	$148.60
Add: Decrease in receivables	$4.30
Cash received from customers	$152.90

Computation of cash paid for inventory
Particulars	Amount (In millions)
Cost of Goods Sold	$89.30
Add: Increase in inventory	$5.30
Purchases made during the year	$94.60
Less: Increase in accounts payable	$8.30
Cash paid to supplier for inventory	$86.30

Computation of cash paid for Salaries
Particulars	Amount (In millions)
Salaries expense	$18.60
Less: Increase in salaries payable	$2.30
Cash paid for salaries expenses	$16.30

Computation of cash paid for Insurance
Particulars	Amount (In millions)
Insurance expense	$11.60
Less: Decrease in prepaid insurance	$1.30
Cash paid for insurance	$10.30

Computation of cash paid for Income Tax
Particulars	Amount (In millions)
Income tax expense	$14.25
Less: Increase in income tax payable	$5.30
Cash paid for income tax	$8.95

Computation of cash paid for Interest
Particulars	Amount (In millions)
Interest expense	$5.30
Less: Decrease in bond discount	$2.65
Cash paid for interest	$2.65

Journal Entries - Mike Roe Computers (In millions)
Event	Particulars	Debit	Credit
1	Cash Dr	$152.90
	To Accounts receivables		$152.90
	(To record collection from customers)
2	Accounts Payable Dr	$86.30
	To Cash		$86.30
	(To record payment to suppliers)
3	Salaries payable Dr	$16.30
	To Cash		$16.30
	(To record payment of salary)
4	Interest payable Dr	$2.65
	To Cash		$2.65
	(To record payment of interest)
5	Insurance expense Dr	$10.30
	To Cash		$10.30
	(To record insurance payment)
6	Income tax payable Dr	$8.95
	To Cash		$8.95
	(To record income tax payment)

Solution 2:

Mike Roe Computer
Statement of Cash Flows (Direct Method) (Partial)
For Year Ended December 31, 2018
Particulars	Details	Amount (In millions)
Cash Flows from operating activities:
Cash received from customers		$152.90
Less: Cash disbursement:
Cash paid to supplier for inventory		-$86.30
Cash paid for salaries		-$16.30
Cash paid for interest		-$2.65
Cash paid for insurance		-$10.30
Cash paid for income taxes		-$8.95
Net Cash provided by operating activities		$28.40