Suppose your company sells services of $180 in exchange for $110 cash and $70 on account. Required: Prepare the journal entry to record this transaction. Identify the amount that should be reported as net cash flow from operating activities. Identify the amount that would be included in net income. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities (requirement 2).

Dr Cash                          $110

Dr Accounts receivable $70

Cr Service revenue                    $180

Explanation:

The necessary accounting for the transaction is debit of $110 to cash account and debit of $70 to receivable while a credit of $180 is passed to service revenue account.

The amount that would be included in cash flow from operating activities is the actual cash of $110,but the whole $180 would be shown in income statement

Using the indirect method of showing net cash flows from operating activities,the entries in the cash flow would like thus:

Net income                                                            $180

Increase in working capital(accounts receivable) ($70)

Net cash flow from operating activities                 $110

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