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?