Effect of product versus period costs on financial statements Hoen Manufacturing

Question

Effect of product versus period costs on financial statements Hoen Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, all transactions are cash transactions.
1. Acquired $ 50,000 cash by issuing common stock.
2. Paid $ 8,000 for the materials used to make products, all of which were started and completed during the year.
3. Paid salaries of $ 4,400 to selling and administrative employees.
4. Paid wages of $ 7,000 to production workers.
5. Paid $ 9,600 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $ 1,600 estimated salvage value and a four- year useful life.
6. Paid $ 13,000 for manufacturing equipment. The equipment was acquired on January 1. It had a $ 1,000 estimated salvage value and a three- year useful life.
7. Sold inventory to customers for $ 25,000 that had cost $ 14,000 to make.
Required Explain how these events would affect the balance sheet, income statement, and statement of cash flows by recording them in a horizontal financial statements model as indicated here. The first event is recorded as an example. In the Cash Flow column, indicate whether the amounts represent financing activities ( FA), investing activities ( IA), or operating activities ( OA).

Explanation / Answer

1. Acquired $50,000 cash by issuing common stock. Balance sheet: Increase assets and equity Income Statement: No effect. Cash flow: Increase (FA) 2. Paid $8,000 for the materials used to make products, all of which were started and completed during the year. Balance sheet: Increase one asset, decrease another Income statement: No effect Cash flow: Decrease (OA) 3. Paid salaries of $ 4,400 to selling and administrative employees. Balance sheet: Decrease assets and equity Income statement: Increase expenses Cash flow: Decrease (OA) 4. Paid wages of $7,000 to production workers. Balance sheet: Decrease assets, decrease equity. Income Statement: Increase expenses Cash flow: Decrease (OA) 5. Paid $ 9,600 for furniture used in selling and administrative offices. Balance sheet: Increase one asset, decrease another Income statement: No effect Cash flow: Decrease (IA) The furniture was acquired on January 1. It had a $1,600 estimated salvage value and a four- year useful life. Balance Sheet: Decrease assets, decrease equity Income statement: Increase expenses Cash flow: No effect 6. Paid $13,000 for manufacturing equipment. Balance sheet: Increase one asset, decrease another Income statement: No effect Cash flow: Decrease (IA) The equipment was acquired on January 1. It had a $1,000 estimated salvage value and a three- year useful life. Balance sheet: Decrease assets, decrease equity Income statement: Increase expenses Cash flow: No effect

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