Jones Company is a merchandiser whose income statement for Year 2 follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . 1,200
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Selling and administrative expenses . . . . . . . . . . 500
Income before taxes . . . . . . . . . . . . . . . . . . . . . . 300
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180
The company€™s selling and administrative expense for Year 2 includes $80 of depreciation expense. Selected balance sheet accounts for Jones at the end of Years 1 and 2 are as shown on next page:

Required:
1. Using the direct method, convert the company€™s income statement to a cash basis.
2. Assume that during Year 2 Jones has a $7,000 gain on the sale of investments and a $2,000 loss on the sale of equipment. Explain how these two transactions would affect your computations in (1)above.

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Year 2 Year 1 Current Assets 00 230 180 36 Inventory. Prepaid expenses.. Current Liabilities Accounts payable. 100 Accrued liabilities.... Income taxes payable. 160 40 80 20 70 90