Question

Applying Financial Statement Linkages to Understand Transactions
Consider the effects of the independent transactions, a through h, on a company's balance sheet, income statement, and statement of cash flows. Complete the table below to explain the effects and financial statement linkages. Refer to Exhibit 2.10 as a guide for the linkages.
a. Wages are earned by employees but not yet paid.
b. Inventory is purchased on credit.
c. Inventory purchased in transactions b is sold on credit (and for more than its cost).
d. Collected cash from transaction c.
e. Equipment is acquired for cash.
f. Paid cash for inventory purchased in transaction b.
g. Paid cash toward a note payable that came due.
h. Paid cash for interest on borrowings.

To indicate the account increases (+), enter "1" in the answer box.  
To indicate the account decreases (-), enter "2" in the answer box.
If the account is not impacted by the transaction, leave the answer box blank.

	a.	b.	c.	d.	e.	f.	g.	h.
Balance sheet
Cash	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Noncash assets	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Total liabilities	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Contributed capital	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Retained earnings	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Other equity	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Statement of cash flows
Operating cash flow	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Investing cash flow	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Financing cash flow	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Income statement
Revenues	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Expenses	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Net income	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Statement of stockholders' equity
Contributed capital	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer
Retained earnings	Answer	Answer	Answer	Answer	Answer	Answer	Answer	Answer

Answer 1

	a.	b.	c.	d.	e.	f.	g.	h.
Balance sheet
Cash				1	2	2	2	2
Noncash assets		1	1	2	1
Total liabilities	1	1				2	2
Contributed capital
Retained earnings	2		1					2
Other equity
Statement of cash flows
Operating cash flow				1		2
Investing cash flow					2
Financing cash flow							2	2
Income statement
Revenues			1
Expenses	1							1
Net income	2		1					2
Statement of stockholders' equity
Contributed capital
Retained earnings	2		1					2

Explaination:

a. Wages accrued - So debited to P&L as expense, reduction in Net income, Reduction in retained earnings due to reduction in Net Income, Credited Liability as wages payable.

b. Inventory Purchases on credit - So debited to inventory as current asset, Credited Liability as creditor.

c. Inventory purchased in b sold on credit - Debit receivable, credit sales so revenue incresed, so net income increases and retained earnings also increases.

d. Collected cash from transaction c - Debited cash, Receivable credited so decreases, cash inflow from operating activities.

e. Equipment acquired for cash - Debited non cash assets, credit cash so decreases, Cash outflow from investing activities.

f. Paid cash for inventory purchased in transaction b - Creditor debited so liabilities decreases, cash credited so cash decreases, cash outflow from operating activities.

g. Paid cash toward a note payable that came due - debited note payable so liabilities decreases, cash paid so cash decreases, cash outflow from financing activities.

h. Paid cash for interest on borrowings - Interest exp debited P&L, so net income decreases, so retained earnings decreases, cash paid so cash decreases, cash outflow from financing activities.