Question

Transactions that affect earnings do not necessarily affect cash. Identify the effect, if any, that each of the following transactions would have upon cash and net income. The first transaction has been completed as an example.

Answer 1

Answer:

See explanation section

Explanation:

                                                                          Cash          Net Income

a) Purchased $100 of supplies for cash         -$100             No Effect

Note: Purchasing supplies will reduce cash that is an asset and on the other hand, supplies is also an asset which will increase due to purchase. Therefore, no effect on net income.

b) Recorded an adjusting entry to record       No Effect          -$20

use of $40 of the above supplies.

Note: Using of supplies means supplies will reduce. That means asset will reduce. On the other hand, an expense, that is, supplies expense will increase that leads to the decrease on net income.

c) Made sales of $1,300, all on account.         No Effect           $1,300

Note: Sales on accounts will affect the net income directly but as the company does not receive cash, there is no effect on cash.

d) Received $800 from customers in               $800                No Effect

payment of their accounts

Note: Receive cash will affect the cash, $800. As accounts receivable decreases, there is no effect on net income.

e) Purchased equipment for cash, $2,500    -$2,500            No Effect

Note: Purchasing equipment will reduce cash that is an asset and on the other hand, equipment is also an asset which will increase due to purchase. Therefore, no effect on net income.

f) Recorded depreciation of building for        No Effect           -$600

period used, $600

Note: Depreciation of building is an expense, therefore, net income will decrease. As depreciation expense is a non-cash account, no effect on cash.