Question

Exercise 1: Explain how the following transactions affected the balance sheet equation by completing the table below. Record an I for increase, D for decrease, or N/E for no effect. The table contains the solution for the first transaction.

1. Received cash from the sale of common stock to investors
2. Borrowed money from a bank
3. Purchased equipment (furniture, computers, and so forth) with cash
4. Purchased some inventory with cash
5. Purchased additional inventory on credit (i.e., the promise to pay cash at a future date)
6. Made a sale by selling some of the inventory to a customer on credit
7. Recorded the decrease in inventory associated with the sale made in number 6 above.

Explain how each of the transactions in Exercise 1 affected the statement of cash flows by completing the following table. Use the I, D, and N/E symbols established in Exercise 1 to do so.

Trans.	Operating Activities	Investing Activities	Financing Activities
1	N/E	N/E	I
2
3
4
5
6
7

Trans.	Assets		Liabilities	Shareholders’ Equity
1	I		N/E	I
2
3
4
5
6
7

Answer 1

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Trans.	Operating Activities	Investing Activities	Financing Activities	Remarks
1	N/E	N/E	I	Cash received from common shareholder
2	N/E	N/E	I	Cash Received from Loan
3	N/E	D	N/E	Cash Paid for Asset
4	D	N/E	N/E	Cash Paid for Inventory
5	N/E	N/E	N/E	No Impact on Cash
6	N/E	N/E	N/E	No Impact on Cash
7	N/E	N/E	N/E	No Impact on Cash
				Working for Reference
Trans.	Assets	Liabilities	Shareholders’ Equity	Debit Account	Credit Account
1	I	N/E	I	Cash-Asset	Common Stock-Equity
2	I	I	N/E	Cash-Asset	Loan/Note Payable-Liabilities
3	N/E (Since increase in Equipment and Decrease in Cash will have ultimately zero impact on total assets)	N/E	N/E	Equipment-Asset	Cash-Asset
4	N/E (Since increase in Equipment and Decrease in Cash will have ultimately zero impact on total assets)	N/E	N/E	Inventory-Asset	Cash-Asset
5	I	I	N/E	Inventory-Asset	Accounts Payable-Liabilities
6	I	N/E	I (Sale will increase Equity)	Accounts Receivable-Asset	Sale
7	D	N/E	D	Cost of Goods Sold-Equity	Inventory-Asset