Question

Describe impacts on the 3 financial statements (balance sheet, income statement and cash flow statement) of:

a. An increase of accounts receivables by $100 b. An increase of accrued expenses by $100
c. A decrease of prepaid expenses by $100
d. An increase in inventory by $100 (paid in cash)

e. An increase in depreciation by $100

f. A sale of equipment for $200 (value on the balance sheet: $170)

Remark: consider all above questions as independent of each other.

Answer 1

(a) B/S -Accounts Receivables reflected in assets column of balance sheet. An increase of AR( accounts receivables ) effects the increase of assets under the head of Debtors. It works to offset the items that appear in the liabilities column.so increase of A/R by $100 leads to increase of debtors (C.A) by $100.

Income stat- A/R is the Balance sheet Item,they do not directly effect our company's income statement. Changes in A/R effects the balance sheet and cash flow statement. There is no way impacts the income statement.SO increase of $100 doesn't effect the income statement .

Cash flow stat-A/R means Debtors and Bills receivables . they are the debit balances to whom we sale on credit basis. so increase in debit balances implies decrease in cash flow due to more on credit sale. simply we can say a/r is current assets and increase in current asset implies reduction of cash flow.so Increase of A/R $100 will leads to decreases of cash flow by $100

(b)B/s- Accrued Expenses are expenses that have occurred but are not paid or not yet recorded in the company books. It is recorded under liabilities side under accounts payable. So increase in accrued exp will leads to increase in liabilities. such liability decreases when the business pays cash to the creditors.

Income stat- Accrued expense often are in the form of accounts payable . an increase in accrued expense has a decreasing the effect on the income statement.so increase in Accrued exp by$100 will decrease the income by$100.

Cash Flow Stat-Increase in Accrued exp will absolutely affect the cash flow, but it can temporarily affect the cash flow by the amount saved in taxes from an increase in exp on the income statement.So increase in outstanding exp of $100 will leads to an increase in cash flows since less cash is having the company.

(c)B/s- Prepaid exp are future expenses that have been paid in advance.it will be reflected on company balance sheet as a current assets. so decrease of prepaid exp of $100 will lead to decrease of current assets by $100.

Income stat- Decrease of prepaid expense doesn't effect the income stat. prepaid exp are not recorded on an income stat initially, it was recorded on b/s. when it was realized or exp is incurred it is recognized on income stat. so there was no effect on income stat.

Cash flow stat- Decrease of prepaid exp results in an increase in cash flow. means prepaid exp decreased since there is no movement of cash. so leads to increase of cash flow.

(d) B/s- Increase of inventory will leads to increase of current assets under inventory column. it works to offset the items that appear in the liabilities column.so increase of inventory by $100 leads to increase of debtors (C.A) by $100.

Income stat-Increase in inventory is a component in the calculation of the cost of goods sold, which is often presented on the income stat. so increase in inventory will be added to a company's purchases of goods to arrive at the cost of goods sold. increase in inventory cost will leads to lower cost of goods sold. so net income can be computed by deducting cost of goods sold form net sales.finally increase in inventory will results in increase in net income.

Cash flow stat- Increase in inventory indicates company has purchased the more goods. since purchase of inventory requires additional outflow of cash. outflow of cash leads to negative impact. since increase in inventory leads to decrease of cash flow.