Exercise 3-11: the impact on the accounting equation, if and how it affects net
ID: 2511680 • Letter: E
Question
Exercise 3-11: the impact on the accounting equation, if and how it affects net income, and if and how it affects cash. Using Event 1 as an example: Purchased merchandise inventory for cash: assets: + inventory and - cash; no effect on liabilities or equity; no effect on net income, - cash. With your answers, you need to explain your reasoning and how you solved the problem
Exercise 3-11 Determining the effect of inventory transactions on the horizontal statements model: Perpetual system
Bali Sales Company experienced the following events:
1. Purchased merchandise inventory for cash.
2. Purchased merchandise inventory on account.
3. Returned merchandise purchased on account.
4. Sold merchandise inventory for cash. Label the revenue recognition 4a and the expense recognition 4b.
5. Paid cash on accounts payable not within the discount period.
6. Sold merchandise inventory on account. Label the revenue recognition 6a and the expense recognition 6b.
7. Paid cash for selling and administrative expenses.
8. Paid cash for transportation-in.
9. Collected cash from accounts receivable.
10. Paid cash for transportation-out.
Identify each event as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each event affects the financial statements by placing a + for increase, ? for decrease, or NA for not affected under each of the components in the following statements model. Assume the use of the perpetual inventory system. The first event is recorded as an example.
Explanation / Answer
Solution
Event No.
Event Type
Assets
=
Liability
+
Equity
Revenue
-
Expenses
=
Net Income
Cash Flow
1.
AE
+ -
=
NA
NA
NA
NA
=
NA
-OA (Operating Activities)
2.
AS
+
=
+
NA
NA
NA
=
NA
-NA (No Affect, as no cash flow takes place)
3.
AU
-
=
-
NA
NA
NA
=
NA
-NA (No Affect, as no cash flow takes place)
4 (a).
AS
+
=
NA
+
+
NA
=
+
+OA (Operating Activities)
4 (b).
AU
-
=
NA
-
NA
+
=
-
-NA (No Affect, as no cash flow takes place)
5.
AU
-
=
-
NA
NA
NA
=
NA
-OA (Operating Activities)
6 (a).
AS
+
=
NA
+
+
NA
=
NA
-NA (No Affect, as no cash flow takes place)
6 (b).
AU
-
=
NA
-
NA
+
=
-
-NA (No Affect, as no cash flow takes place)
7.
AU
-
=
NA
-
NA
+
=
-
-OA (Operating Activities)
8.
AU
+ -
=
NA
NA
NA
NA
=
NA
-OA (Operating Activities)
9.
AS
+ -
=
NA
NA
NA
NA
=
NA
+OA (Operating Activities)
10.
AU
-
=
NA
-
NA
+
=
-
-OA (Operating Activities)
Explanation:
Event No.1: Purchased merchandise inventory for cash: It increases cash and inventory. It will be recorded as cash outflow in cash flow statement under operating activities.
Event No.2: Purchased merchandise inventory on account: It increases liability with the name of account payable and increases assets with name of inventory. It will not be recorded in cash flow statement as cash is not involved in this transaction.
Event No.3: Returned merchandise purchased on account: It reduces liability (that is account payable) and reduces inventory too. It will not be recorded in cash flow statement as cash is not involved in this transaction.
Event No.4: Sold merchandise inventory for cash:
For Revenue Recognition: It increases cash and equity followed by increase in revenues and therefore increases in net income. It will not be recorded in cash flow statement as cash is not involved in this transaction.
For expenses: It reduces inventory asset, reduces equity followed by increase in expenses and therefore decrease in net income. It will not be recorded in cash flow statement as the expense for cost of goods sold has already been taken in account.
Event No.5: Paid cash on accounts payable not within the discount period: It reduces cash asset and also reduces liability as payment is made to accounts payable. It will be recorded as cash outflow in cash flow statement under operating activities.
Event No.6: Sold merchandise inventory on Account.
For Revenue Recognition: It increases account receivable asset and equity followed by increase in revenues. It will be recorded as cash inflow in cash flow statement under operating activities.
For expenses: It reduces inventory asset, reduces equity followed by increase in expenses and therefore decrease in net income. It will not be recorded in cash flow statement as the expense for cost of goods sold has already been taken in account.
Event No.7: Paid cash for selling and administrative expenses: It reduces cash asset, reduces equity followed by increase in expenses and therefore decrease in net income. It will be recorded as cash outflow in cash flow statement under operating activities.
Event No.8: Paid cash for transportation-in: In perpetual inventory system cost of transportation –in (cost incurred to transport inventory from suppliers’ place to business premises) is added in the cost of goods sold. So, it increase asset (inventory) and also reduces cash asset as expenses paid. It will be recorded as cash outflow in cash flow statement under operating activities.
Event No.9: Collected cash from accounts receivable: It increases cash asset as cash collected and at the same time reduces. It will be recorded as cash inflow in cash flow statement under operating activities.
Event No.10: Paid cash for transportation-out: It reduces cash asset, reduces equity followed by increase in expenses and therefore decrease in net income. It will be recorded as cash outflow in cash flow statement under operating activities.
Event No.
Event Type
Assets
=
Liability
+
Equity
Revenue
-
Expenses
=
Net Income
Cash Flow
1.
AE
+ -
=
NA
NA
NA
NA
=
NA
-OA (Operating Activities)
2.
AS
+
=
+
NA
NA
NA
=
NA
-NA (No Affect, as no cash flow takes place)
3.
AU
-
=
-
NA
NA
NA
=
NA
-NA (No Affect, as no cash flow takes place)
4 (a).
AS
+
=
NA
+
+
NA
=
+
+OA (Operating Activities)
4 (b).
AU
-
=
NA
-
NA
+
=
-
-NA (No Affect, as no cash flow takes place)
5.
AU
-
=
-
NA
NA
NA
=
NA
-OA (Operating Activities)
6 (a).
AS
+
=
NA
+
+
NA
=
NA
-NA (No Affect, as no cash flow takes place)
6 (b).
AU
-
=
NA
-
NA
+
=
-
-NA (No Affect, as no cash flow takes place)
7.
AU
-
=
NA
-
NA
+
=
-
-OA (Operating Activities)
8.
AU
+ -
=
NA
NA
NA
NA
=
NA
-OA (Operating Activities)
9.
AS
+ -
=
NA
NA
NA
NA
=
NA
+OA (Operating Activities)
10.
AU
-
=
NA
-
NA
+
=
-
-OA (Operating Activities)
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