E12-2 Understanding the Computation of Cash Flows from Operating Activities (Indirect Method)

Suppose your company sells services of $180 in exchange for $110 cash and $70 on account.

Required:

1. Show the journal entry to record this transaction.

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

3. Identify the amount that would be included in net income.

4. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities (requirement 2).

5. What general rule about converting net income to operating cash flows is revealed by your answer to requirement 4?