Question

Wiley Company’s income statement for Year 2 follows:

Sales	$	2,950
Cost of goods sold		1,000
Gross margin		1,950
Selling and administrative expenses		400
Income before taxes		1,550
Income taxes		620
Net income	$	930

The company’s selling and administrative expense for Year 2 includes $76 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	$	215		$	240
Inventory	$	168		$	200
Prepaid expenses	$	42		$	23
Current Liabilities
Accounts payable	$	116		$	75
Accrued liabilities	$	6		$	26
Income taxes payable	$	110		$	60

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 $5,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

Answer 1

			Income statement	Working Note	Cash basis
		Sales	2,950	1	2,925
		Cost of goods sold	1,000	2	991
		Gross margin	1,950		1,934
		Selling and administrative expenses	400	3	263
		Income before taxes	1,550		1,671
		Income taxes	620	4	570
		Net income	930		1,101
Working Notes	1		Account receivable T a/c
		beg. Bal.	240
				Sales	2,950
		Cash(balancing figure)	2,925
		Ending bal.	215
	2		Inventory A/c
		beg. bal.	200
				Cost of goods sold	1,000
		Purchases(bal. fig)	1,032
		Ending bal.	168
			Account payable A/c
				beg. Bal.	75
				Inventory(purchases)	1,032
		Cash(payment)(bal. fig)	991
				Ending bal.	116
	3		Selling and admin exp. A/c
		Prepaid op bal.	23	Accured op. bal.	26
		Depreciation	76	income statement	300
		Cash paid	263
		Accrued closing bal.	6	Prepaid closing bal.	42
			368		368
			Income tax payable a/c
				beg. Bal.	60
		Cash	570	Income taxes	620
		Ending bal.	110
			680		680
				Ending bal.	110

2. These transactions will not affect the computation in (1) above as direct method has been followed while converting accounting basis to cash basis.

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