Required information E12-3 Understanding the Computation of Cash Flows from Operating Activities (Indirect Method) [LO 12-2] [The following information applies to the questions displayed below.] Suppose your company sells services for $485 cash this month. Your company also pays $340 in salaries and wages, which includes $175 that was payable at the end of the previous month and $165 for salaries and wages of this month. E12-3 Part 2, 3 and 4 Calculate the amount that should be reported as net cash flow from operating activities. Calculate the amount that should be reported as net income. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities (requirement 2).

Net income = $320

Net cash flow from Operating activity = $145

Explanation:

The journal entries are shown below:

1. Cash A/c Dr $485

To Service revenue A/c $485

(Being sales service is provided for cash)

2. Salary expense A/c Dr $165

Outstanding salary expense A/c Dr $175

To Salary and wages payable A/c $340

(Being salary expense is recorded)

Salary and wages payable A/c $340

To Cash $340

(Being salary and wages are paid)

The net cash flow from operating activities would be

= Service revenue - salaries and wages payable

= $485 - $340

= $145

The net income would be

= Sales - salary expense

= $485 - $165

= $320

Cash flow from Operating activities under the indirect method

Net income $320

Less: Decrease in salary payable - $175

Net Cash flow from Operating activities $145