Question

Grover Inc. uses the allowance method to account for uncollectible accounts expense. Grover Inc. experienced the following four accounting events in Year 1:

1. Recognized $92,000 of revenue on account.
2. Collected $78,000 cash from accounts receivable.
3. Wrote off uncollectible accounts of $720.
4. Recognized uncollectible accounts expense. Grover estimated that uncollectible accounts expense will be 1 percent of sales on account.

Required
a. Show the effect of each event on the elements of the financial statements, using a horizontal statements model like the one shown next. Use + for increase and − for decrease. In the Statement of Cash Flows column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Columns for events that have no effect on any of the elements should be left blank. The first transaction is entered as an example.

Return to question Grover Inc. uses the allowance method to account for uncollectible accounts expense. Grover Inc. experienced the following four accounting events in Year 1: 1. Recognized $92,000 of revenue on account. 2. Collected $78,000 cash from accounts receivable. 3. Wrote off uncollectible accounts of $720. 4. Recognized uncollectible accounts expense. Grover estimated that uncollectible accounts expense will be 1 percent of sales on account. Required . Show the effect of each event on the elements of the financial statements, using a horizontal statements model like the one shown hext. Use + for increase and – for decrease. In the Statement of Cash Flows column, indicate whether the item is an operating activity OA), investing activity (A), or financing activity (FA). Columns for events that have no effect on any of the elements should be left Slank. The first transaction is entered as an example. (Note: Not all cells will require an input.) Answer is not complete. Balance Sheet Effect of Events on the Financial Statements Income Statement Stockholders' Revenue - Expense Equity Cash Flow Event = Liabilities Net Income Assets + +- + + 1 +

Answer 1

Effects of events on the financial statements

Balance Sheet

Income statement

Event

Assets

=

Liabilities

+

Stockholders’ equity

revenue

-

expense

=

Net income

Cash flow

1

+

NA

+

+

NA

+

NA

2

+/-

NA

NA

NA

NA

NA

+

OA

3

+/-

NA

NA

NA

NA

NA

NA

NA

4

-

NA

-

NA

+

-

NA

NA

Event 1: Revenue on account increase, assets by increasing accounts receivable and stockholders’ equity due to increase in revenue and net income. It is a credit transaction and thus no effect in cash flow statement.

Event 2: due cash collection on account, cash increases in assets on one hand and accounts receivable decreases in assets on other hand. As cash received, it increases cash flow from operating activities.

Event 3: writing off uncollectible accounts increases the amount of uncollectible accounts on the assets side on the one hand and decreases the amount of accounts receivable on the assets side on the other hand.

Event 4: recognizing uncollectible accounts reduces accounts receivable on the asset side. It is increases expense and thus reduces net income and stockholders’ equity. As the net income is transferred to stockholders’ equity account.