To support himself while attending school, Steve Owens sold computers to other students. During the year, Steve purchased computers for $150,000 and sold them for $280,000 cash. He provided his customers with a one-year warranty against defects in parts and labor. Based on industry standards, he estimated that warranty claims would amount to 5 percent of sales. During the year, he paid $1,545 cash to replace a defective hard drive.

Required
a. Prepare an income statement and statement of cash flows for Steve’s first year of operation.
b. Explain the difference between net income and the amount of cash flow from operating activities.