Question

Wiley Company’s income statement for Year 2 follows:

Sales	$	2,550
Cost of goods sold		1,200
Gross margin		1,350
Selling and administrative expenses		300
Income before taxes		1,050
Income taxes		420
Net income	$	630

The company’s selling and administrative expense for Year 2 includes $74 of depreciation expense. Selected balance sheet accounts for Wiley at the end of Years 1 and 2 are as follows:

	Year 2			Year 1
Current Assets
Accounts receivable	$	195		$	240
Inventory	$	152		$	192
Prepaid expenses	$	34		$	22
Current Liabilities
Accounts payable	$	130		$	81
Accrued liabilities	$	6		$	28
Income taxes payable	$	112		$	65

Required:

1. Using the direct method, convert the company’s income statement to a cash basis?

2. Assume that during Year 2 Wiley had a $14,000 gain on sale of investments and a $6,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

Answer 1

			Income statement	Working Note	Cash basis
		Sales	2,550	1	2505
		Cost of goods sold	1,200	2	1,191
		Gross margin	1,350		1,314
		Selling and administrative expenses	300	3	260
		Income before taxes	1,050		1,054
		Income taxes	420	4	373
		Net income	630		681
Working Notes	1		Account receivable T a/c
		beg. Bal.	240
				Sales	2,550
		Cash(balancing figure)	2,505
		Ending bal.	195
	2		Inventory A/c
		beg. bal.	192
				Cost of goods sold	1,200
		Purchases(bal. fig)	1,240
		Ending bal.	152
			Account payable A/c
				beg. Bal.	81
				Inventory(purchases)	1,240
		Cash(payment)(bal. fig)	1,191
				Ending bal.	130
	3		Selling and admin exp. A/c
		Prepaid op bal.	22	Accured op. bal.	28
		Depreciation	74	income statement	300
		Cash paid	260
		Accrued closing bal.	6	Prepaid closing bal.	34
			362		362
			Income tax payable a/c
				beg. Bal.	65
		Cash	373	Income taxes	420
		Ending bal.	112
			485		485
				Ending bal.	112

2. if during the year 2 wiley had a 14,000 gain on sale of investments and $6000 loss on the sale of equipment. These transactions would not affect the computation in (1) above. As above income statement has been prepared on the basis of direct method. Income is not taken as base to compute actual cash flow.