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Wiley Company's income statement for Year 2 follows: Sales $ 150,000 Cost of goods sold 90,000 Gross margin 60,000 Selling and administrative expenses 40,000 Income before taxes 20,000 Income taxes 8,000 Net income $ 12,000 The company's selling and administrative expense for Year 2 includes $7,500 of depreciation expense
Wiley Company's income statement for Year 2 follows:
Sales $ 150,000
Cost of goods sold 90,000
Gross margin 60,000
Selling and administrative expenses 40,000
Income before taxes 20,000
Income taxes 8,000
Net income $ 12,000
The company's selling and administrative expense for Year 2 includes $7,500 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 $ 40,000 $ 30,000
Inventory $ 54,000 $ 45,000
Prepaid expenses $ 8,000 $ 6,000
Current Liabilities
Accounts payable $ 35,000 $ 28,000
Accrued liabilities $ 5,000 $ 8,000
Income taxes payable $ 2,000 $ 2,500
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 $9,000 gain on sale of investments and a $3,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?
Expert Solution
1)
| Wiley Company | ||
| Direct Method of Determining the Net cash flows from operating activities | ||
| Sales | 150000 | |
| Adjustment to a cash basis : | ||
| Less :Increase in accounts receivable (40000- 30000) | 10000 | 140000 |
| Cost of goods sold | 90000 | |
| Adjustment to a cash basis: | ||
| Add: Increase in inventory ( 54000-45000) | 9000 | |
| Less :Increase in accounts payable (35000-28000) | -7000 | 92000 |
| Selling and administrative expense | 40000 | |
| Adjustment to a cash basis | ||
| Less: Depreciation expense | -7500 | |
| Add: Increase in prepaid expense ( 8000-6000 ) | 2000 | |
| Add: Decrease in accrued liabilities ( 8000 - 5000 ) | 3000 | 37500 |
| Income tax expense | 8000 | |
| Adjustment to a cash basis | ||
| Less: Decrease in income taxes payable ( 2500 - 2000 ) | 500 | 8500 |
| Net cash provided by operating activities | 2000 |
2) No, gains and loss on income statement are ignored under direct method.
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