Question

Required Explain how each of the following events or series of events and the related adjusting entry will affect the amount of net income and the amount of cash flow from operating activities reported on the year-end financial statements. Identify the direction of change increase, decrease, or NA) and the amount of the change. Organize your answers according to the following table. The first event is recorded as an example. If an event does not have a related adjusting entry, record only the effects of the event. (Not all cells require entry. Do not round intermediate calculations and round your final answers to nearest whole dollar amount.) a. Paid $2,600 cash on October 1 to purchase a one-year insurance policy. b. Purchased $1,300 of supplies on account. Paid $800 cash on accounts payable. The ending balance in the Supplies account, after adjustment, was $300. c. Provided services for $7,700 cash. d. Collected $10,500 in advance for services to be performed in the future. The contract called for services to start on May 1 and to continue for one year. e. Accrued salaries amounting to $4,500. f. Sold land that cost $17,100 for $17,100 cash. g. Acquired $50,500 cash from the issue of common stock, h. Earned $12,900 of revenue on account Collected $11,610 cash from accounts receivable. 1. Paid cash operating expenses of $1,850. Net Income Cash Flows from Event Operating Activities Adjustment Direction of Amount of Direction of Amount of Change Change Change Change a NA Decrease $ 2.600 Adj Decrease $ 650 NA b. Decrease Decrease Adi Decrease Decrease c Adi d Adi < Prev 8 of 8 Next >

Answer 1

Answer:

	Net Income		Cash Flows from Operating Activities
Event/Adjustment	Direction of change	Amount of change	Direction of change	Amount of change
a	NA		Decrease	2,600
Adj.	Decrease	650	NA
b	NA		Decrease	800
Adj.	Decrease	1,000	NA
c	Increase	7,700	Increase	7,700
Adj.	NA		NA
d	NA		Increase	10,500
Adj.	Increase	7,000	NA
e	Decrease	4,500	NA
Adj.	NA		NA
f	NA		NA
Adj.	NA		NA
g	NA		NA
Adj.	NA		NA
h	Increase	12,900	Increase	11,610
Adj.	NA		NA
i	Decrease	1,850	Decrease	1,850
Adj.	NA		NA

Explanation:

a. Paid $2,600 cash on October 1 to purchase a one-year insurance policy doesnt have total impact on net income. But as this is an operating activity, there is decrease in cash flow of 2,600. But there is an adjustment that affect the net income.

Adjustment = 2600 x 3/12 = 650 which will reduce net income

b. Purchased $1,300 of supplies on account. Paid $800 cash on accounts payable doesnt have total impact on net income. But as this is an operating activity, there is decrease in cash flow of 800. But there is an adjustment that affect the net income.

The ending balance in the supplies account, = $300.

Adjustment = 1,300 - 300  = 1000 which will reduce net income

c. Provided services for $7700 cash have total impact on net income. Also as this is an operating activity, there is increase in cash flow of 7700 . No adjustment required.

d. Collected $10,500 in advance for services to be performed in the future doesnt have total impact on net income. But as this is an operating activity, there is increase in cash flow of 10,500 . But there is an adjustment that affect the net income.

Since contract called for services to start on May 1 and to continue for one year.

Adjustment = 10,500 x 8/12 = 7000 which will increase net income

e. Accured salaries amounting to $4,500 will reduce net income directly. It is not an operating activity.

f. Sold land that cost $17100 for $17100 cash will have no impact because they will be treated under investing activities in cash flow statement and they will not impact the income statement of the business.

g. Acquired $50500 cash from the issue of common stock will have no impact because they will be treated under financing activities in cash flow statement and they will not impact the income statement of the business.

h. Earned $12,900 of revenue on account will increase revenue. So it will directly increase the net income. Collected $11610 cash from accounts receivable will increase the cash flow since it is an operating activity.

i. Paid cash for other operating expenses of $1,850. Since operating expense comes in income statement it will reduce the net income. Also as it is an operating activity it will also reduce the cash flow