Question

Wiley Company’s income statement for Year 2 follows:

Sales	$	2,800
Cost of goods sold		900
Gross margin		1,900
Selling and administrative expenses		300
Income before taxes		1,600
Income taxes		640
Net income	$	960

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	$	200		$	245
Inventory	$	154		$	200
Prepaid expenses	$	40		$	25
Current Liabilities
Accounts payable	$	105		$	81
Accrued liabilities	$	12		$	23
Income taxes payable	$	122		$	75

Required:

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

Answer 1

$ 2,800 Sales Adjustment to a cash basis decrease in accounts receivable ( 245-200) $ 45 $ 2,845 $ 900 cost of goods sold Adjustment to a cash basis less:decrease in inventory (200-154) less:increase in accounts payable (105-81) $ $ (46) (24) $ 830 $ 300 Selling and administrative expense Adjustment to a cash basis less:Depreciation expense add:increase in prepaid expense (40-25) Add:Decrease in accrued liabilities (23-12) $ $ $ (76) 15 11$ 250 640 income tax expenses $ Adjustment to a cash basis less:increase in income taxes payable (122-751 $ (47) $ 593 net cash provided by operating activities $ 1,172