Question

Wiley Company’s income statement for Year 2 follows:

Sales	$	2,600
Cost of goods sold		1,300
Gross margin		1,300
Selling and administrative expenses		400
Income before taxes		900
Income taxes		360
Net income	$	540

The company’s selling and administrative expense for Year 2 includes $78 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	$	205		$	250
Inventory	$	150		$	182
Prepaid expenses	$	39		$	29
Current Liabilities
Accounts payable	$	116		$	82
Accrued liabilities	$	9		$	28
Income taxes payable	$	108		$	85

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 $11,000 gain on sale of investments and a $6,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Using the direct method, convert the company’s income statement to a cash basis? (Adjustment amounts that are to be deducted should be indicated with a minus sign.)

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

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

Assume that during Year 2 Wiley had a $11,000 gain on sale of investments and a $6,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?

No, gains and losses on income statement are ignored under direct method.radio button unchecked1 of 4 No, gains and losses on income statement are considered under direct method.radio button unchecked2 of 4 Yes, gains and losses on income statement are ignored under direct method.radio button unchecked3 of 4 Yes, gains and losses on income statement are considered under direct method.radio button unchecked4 of 4

• Required 1
• Required 2

Answer 1

Cash Flow Statement
Direct Method
Cash Flow from Operating Activities
Cash Collected from Customers		$          2,645.00		=2600+250-205
Cash paid for inventory		$        -1,234.00		=-(1300+82-116+150-182)
Cash paid for Selling and administrative expenses		$            -351.00		=-(400+28-9+39-29)+78
Cash paid for Income tax		$            -337.00		=-(360+85-108)
Cash from Operating Activities			$             723.00

2.
Answer is a. No, gains and losses on income statement are ignored under direct method

In Direct Method. only operating activities are considered for cash from operating activities, gain from sale of investment and loss on sale of equipment is investing activity