,Introductory Financial Accounting for Business, 1e (Edmonds)
Chapter 1 An Introduction to Accounting
Indicate how each event affects the elements of financial statements. Use the following letters to
record your answer in the box shown below each element. You do not need to enter dollar
amounts. (Note that "Not Affected" means that the event does not affect that element of the
financial statements or the event causes an increase in that element that is offset by a decrease in
the same element.)
Increase = I Decrease = D Not Affected = NA
1) Walker Co. issued common stock for $150,000 cash.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (I) (NA) (I) (NA)
Issuing common stock is an asset source transaction that increases the business's assets (cash)
and its stockholders' equity (common stock). It does not affect the income statement, but is
reported as a cash inflow from financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: BB Critical Thinking; FN Measurement
2) Nguyen Co. borrowed $50,000 cash from Metropolitan Bank.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (I) (I) (NA) (NA)
Borrowing cash is an asset source transaction that increases a business's assets (cash) and its
liabilities (notes payable). It does not affect the income statement, but is reported as a cash
inflow from financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
,3) Bell Co. provided consulting services for $20,000 cash.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (I) (NA) (NA) (I)
This is an asset source transaction that increases the business's assets (cash). When a business
provides services, it earns revenue. Revenue increases net income, which will increase
stockholders' equity (retained earnings). This event is reported as a cash inflow from operating
activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
4) Pierce Co. paid $40,000 cash to purchase land.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (NA) (NA) (NA) (NA)
Purchasing land for cash is an asset exchange transaction that increases one asset (land) and
decreases another asset (cash). It does not affect the income statement, and is reported as an
investing activity in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
, 5) Perez Co. paid $220,000 cash for salaries expense.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (D) (NA) (NA) (D)
Paying expenses is an asset use transaction that decreases the business's assets (cash) and
decreases its stockholders' equity (retained earnings). It is reported as a cash outflow for
operating activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
6) Epstein Co. paid $20,000 in cash dividends to its owners.
Assets = Liabilities + Common Stock + Retained Earnings
Answer: (D) (NA) (NA) (D)
Paying a cash dividend is an asset use transaction that decreases a business's assets (cash) and its
stockholders' equity (retained earnings). It does not affect net income, and is reported as a cash
outflow for financing activities in the statement of cash flows.
Difficulty: 2 Medium
Topic: Recording Business Events Under the Accounting Equation
Learning Objective: 01-05 Show how business events affect the accounting equation.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA: FN Measurement
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