Question

Wiley Company's income statement for Year 2 follows: $ 2,550 1,200 Sales Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income taxes Net income 300 1.050 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 0 ences Current Assets Accounts receivable Inventory Prepaid expenses Current Liabilities Accounts payable Accrued liabilities Income taxes payable $195 $240 $1525192 $ 34 $ 22 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 () above?

Answer 1

1. To calculate cash flow from operating activity under direct method, we will have to convert the items into cash basis.

So it will be as follows :

a) Cash flow from revenue = Sale + opening account receivable - Closing account receivable

2550+240-195 = 2595

b) Cash payment to vendors = Purchase +Closing inventory - opening inventory + opening account payable - closing account payable

1200+152-192+81-130 = 1111

c) Income Tax payable = Expense + beginning - ending

420+65-112 = 373

*Assuming selling and distribution expense is not prepaid.  

d) Cash paid for prepaid assets = closing expense - opening

34-22 = 12

Cash flow is as follows :

Cash Receipts	2595
cash Payment	-1111
Cash for Prepaid asset	-12
Income tax paid	-373

Net Cash Flow from Operating Activities = 1099

2. No, Gains and losses are ignored under direct method.