Question

LO 2-3, 2-4 Exercise 2-7B Effect of accrued expenses on the accounting equatiow and financial statements During Year I, Sur Corporation carned $5,000 of cash revenue and accrued $3,000 of salaries axpense. Required (Hint: Record the events in general ledger accounts under an accounting equation before satisfying the requirements) Based on this information alone: 1. Prepare the December 31, Year 1, balance sheet. Star Corporation Accounting Equation - Year 1 Event Assets - Liabilities Stockholders' Equity Salaries Common Retained Cash Payable Stock Earnings Earned Rev. Accrued Sal. Ending Bal. Star Corporation Balance Sheet

Answer 1

	cash	salary payable	common stock	retained earnings
earned revenue	5000			5000
accrued salary		3000		-3000
ending bal.	5000	3000		2000

a. balance sheet

current assets
cash	5000
Total Assets		5000
liabilities
salary payable	3000
shareholder's equity
retained earnings	2000
Total liabilities and equity		5000

b.computation of net income

revenue	5000
Less: Salaries expense	3000
Net income	2000

c. cash flow from operating activities

Net profit	2000
Add:
increase in salary payable	3000
Net cash flow from operating activities	5000

d.answers differ because net profit is determined on the basis of accrual.

even if salary is not paid it will be deducted to determine net income.

where as cash flow is determined on the basis of cash inflow and cash outflow

salary is not paid so it will be added back to net profit as there is not cash outflow.