Question

Wiley Company’s income statement for Year 2 follows:

Sales	$	2,850
Cost of goods sold		1,100
Gross margin		1,750
Selling and administrative expenses		500
Income before taxes		1,250
Income taxes		500
Net income	$	750

The company’s selling and administrative expense for Year 2 includes $80 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		$	245
Inventory	$	152		$	188
Prepaid expenses	$	35		$	29
Current Liabilities
Accounts payable	$	107		$	75
Accrued liabilities	$	14		$	21
Income taxes payable	$	120		$	75

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 $7,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

	Wiley Company Direct Method of Determining the Net Cash Flows from Operating Activities Adjustments to a cash basis: 0 Adjustments to a cash basis: 0 Selling and administrative expenses Adjustments to a cash basis: 0 Income taxes Adjustments to a cash basis: 0 $0

Answer 1

Working-Direct Cash Flow Statement
Sales	$                                                              2,850.00
Add: Decrease in Accounts receivable	$                                                                    50.00
Cash received from customers	$                                                              2,900.00
Cost of goods sold	$                                                              1,100.00
Less: Decrease in Inventory	$                                                                  -36.00
Purchases	$                                                              1,064.00
Less: Increase in Accounts Payable	$                                                                  -32.00
Cash paid for inventory	$                                                              2,096.00
Operating expenses	$                                                                 500.00
Less: Depreciation	$                                                                  -80.00
Add: Prepaid Expense	$                                                                      6.00
Add: Decrease in Accrued Liabilites	$                                                                      7.00
Cash paid for other operating expenses	$                                                                 433.00
Income Tax expense	$                                                                 500.00
Less: Increase in Income tax Payable	$                                                                  -45.00
Cash paid for income taxes	$                                                                 455.00
1)
Wiley Company
Statement of cash flow(Direct Partial)
Cash Flow from operating activities
Cash Received from customer		$                                           2,900.00
Cash paid to supplier		$                                         (2,096.00)
Cash paid for operating expenses		$                                             (433.00)
Cash paid for Income Taxes		$                                             (455.00)
Net cash provided by operating activities=(A)		$                                               (84.00)
2)
Gain on sale of Investment and loss on sale of Equipment effect the operating activity in case of Indirect merhod of cash flow.
In case of direct method of operating activity of cash flow only actual cash inflows and outflows are recorded.