Question

For the just completed year, Hanna Company had net income of $134,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were as follows:

	December 31
	End of Year		Beginning of Year
Current assets:
Cash and cash equivalents	$	61,000	$	83,000
Accounts receivable	$	166,000	$	196,000
Inventory	$	435,000	$	367,000
Prepaid expenses	$	11,500	$	13,800
Current liabilities:
Accounts payable	$	356,000	$	392,000
Accrued liabilities	$	8,000	$	12,700
Income taxes payable	$	38,000	$	33,000

The Accumulated Depreciation account had total credits of $58,000 during the year. Hanna Company did not record any gains or losses during the year.

The company’s income statement for the year appears below:

Sales	$	1,080,000
Cost of goods sold		600,000
Gross margin		480,000
Selling and administrative expenses		310,000
Income before taxes		170,000
Income taxes		36,000
Net income	$	134,000

Required:

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.)

Answer 1

Hanna Company
Income Statement
Particulars	Computation	Amount $
Sales (collection from Debtors) (a)	Working note 1	1,110,000.00
Cost of Goods sold    (b)	Working note 2	636,000.00
Gross margine	(a-b)	474,000.00
Selling and administrative expenses	(-310000+11500-13800)	(312,300.00)
Income before taxes		161,700.00
Income tax	(-36000+38000-33000)	(31,000.00)
Net Income		130,700.00

Working note1
Particulars	Amount $
Accounts recievable Opening	196,000.00
Add: Sales during the year	1,080,000.00
Less: Closing Accounts recievable	166,000.00
Collection fron accounts recievable/debtors	1,110,000.00
Working note2
Particulars	Amount $
Cost of goods sold	600,000.00
Add:Closing Inventory	435,000.00
Less : Opening Inventory	367,000.00
Purchase	668,000.00
Opening Accounts Payable	392,000.00
Add:Purchase	668,000.00
Less:Closing Accounts Payable	356,000.00
Payment made to accounts payable	704,000.00
Add: Opening Inventory	367,000.00
Less Closing Inventory	435,000.00
Cost of goods sold	636,000.00