EXERCISE 13A–3 Net Cash Provided by Operating Activities (Direct Method) [LO5]

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 Debit Balance Accounts:

Accounts receivable ..................................... $40,000 $30,000 Inventory ...................................................... $54,000 $45,000 Prepaid expenses ........................................ $8,000 $6,000 Credit Balance Accounts:

Accounts payable ......................................... $35,000 $28,000 Accrued liabilities ......................................... $5,000 $8,000 Income taxes payable .................................. $2,000 $2,500 Deferred income taxes ................................. $6,000 $4,000 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. Explain how these two transactions would affect your computations in (1) above.