What are the effects on the income statement, balance sheet, and cash flow statement for each of the following situations? Income statements: Will the net income be decreased, increased or will not be affected by the information contained in each of the three? Balance Sheet: Will the accounts will be decreased or increased? Cash Flow Statements: Will account be decreased or increased or not affected?
• Scenario 1: On July 16, the business owner took home, for personal use, office supplies that cost the company $478.
• Scenario 2: The company accepted a note from the chief executive officer and loaned him $50,000. But the note has no due date, and will only be repaid if the CEO is fired.
• Scenario 3: On December 15, a clerk ordered $15,000 of inventory to be delivered at the end of the year. The clerk asked the supplier to delay billing until the first of next year.
Moreno Valley, California
This will be recorded as
Owner's Draw Dr $478 Office Supplies Cr $478
This will decrease the expense on Income statement and hence increase the net income.
The Equity account of the Owner will be reduced by $478 due to draw and the net income will increase by $478- so there will be no effect on the Balance Sheet.
Cash flow Statement will not be affected. However- Cash from Operating activities will increase by $478 and Cash from financing activities will reduce by $478.
Scenario 2: The company accepted a note from the chief executive officer and loaned him $50,000. But the note has no due date, and will only be repaid if the CEO is fired.
Entry will be
Note Receivable - CEO Dr $50.000
Bank Cr Dr 50,000
This will not affect income statement
Balance Sheet will be affected - Other asset will increase by $50K and Bank balance will reduce by $50K
Cash Flow statement - will report cash outflow flow from investing activities for $50K and hence will decrease the cash balance.
If the billing is delayed, it would mean that this purchase will not be recorded until next year. However inventory of $15,000 will be included as inventory if the physical method of inventory is used.
The income statement will make an adjustment to report this inventory as
Inventory Dr $15000
Cost of Goods Sold Cr $15000
This will reduce the cost of goods sold and hence increase the income on the income statement
Balance sheet will report an increase in inventory of $15,000
Cash flow statement will report a cash outflow for increase in inventory.