Wiley Company's income statement for Year 2 follows: Sales $ 2,800 1,100 Cost of goods sold Gross margin 1,700 Selling and administrative expenses 400 Income before taxes Income taxes Net income The company's selling and administrative expense for Year 2 includes $74 of depreciation expense. Selected balance sheet accounts for Wiley at the end of Years 1 and 2 are as follows: Current Assets Accounts receivable Inventory Prepaid expenses Current Liabilities Accounts payable Accrued liabilities Income taxes payable Year 2 $ 210 $ 166 $ 34 $ 114 $5 $ 118 1,300 520 $ 780 Year 1 $ 255 $ 198 $ 26 $85 $ 30 $ 70 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 $13,000 gain on sale of investments and a $4,000 loss on the sale of equipment. Would these transactions affect the computation in (1) above?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![Wiley Company's income statement for Year 2 follows:
$ 2,800
1,100
1,700
400
1,300
520
$ 780
Sales
Cost of goods sold
Gross margin
Selling and administrative expenses
Income before taxes
Income taxes
Net income
The company's selling and administrative expense for Year 2 includes $74 of depreciation expense. Selected balance sheet accounts
for Wiley at the end of Years 1 and 2 are as follows:
Current Assets
Accounts receivable
Inventory
Prepaid expenses
Current Liabilities
Accounts payable
Accrued liabilities
Income taxes payable
Year 2
$ 210
$166
$ 34
$ 114
$ 5
$ 118
Year 1
$ 255
$ 198
$26
$85
$ 30
$70
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 $13,000 gain on sale of investments and a $4,000 loss on the sale of equipment. Would
these transactions affect the computation in (1) above?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F30da02c1-a4fa-44e5-8122-811dc4853c02%2Ff50b3a4c-4c47-4331-bf0a-a8cb4757045d%2Fkmagmu_processed.png&w=3840&q=75)
![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.)
Sales
Wiley Company
Direct Method of Determining the Net Cash flows from Operating activities
$
2,800
Adjustments to a cash basis:
Decrease in accounts receivable
Cost of goods sold
Adjustments to a cash basis:
Decrease in inventory
Increase in accounts payable
Selling and administrative expenses
Adjustments to a cash basis:
Depreciation
Increase in prepaid expenses
Decrease in accrued liabilities
Income taxes
Adjustments to a cash basis:
Increase in income taxes payable
$
45
1,100
400
(74)
520
$
2,845
1,100
326
520
899](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F30da02c1-a4fa-44e5-8122-811dc4853c02%2Ff50b3a4c-4c47-4331-bf0a-a8cb4757045d%2Fy5fnoea_processed.png&w=3840&q=75)
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