Question

1. How would sale of $400 of inventory on credit affect the financial statement if the cost of the inventory sold was of $160.
   1. It would increase cash by $400 on the income statement and increase revenue by $400 on the balance sheet.
   2. It would decrease non-cash assets by $400 on the balance sheet and decrease retained earnings by $400 on the income statement.
   3. It would increase non-cash assets by $240 on the balance sheet and increase retained earnings by $240 on the balance sheet.
   4. It would increase decrease inventory by $400 on the balance sheet and increase revenue by $400 on the income statement.
2. During fiscal 2016, Shoe Productions recorded inventory purchases on credit of $337.8 million. The financial statement effect of these purchase transactions would be to:
   1. Increase expenses (Cost of goods sold) on the balance sheet and increases liability (accounts payable) on the income statement.
   2. Increase liabilities (Accounts payable) on the balance sheet and increase assets on the balance sheet.
   3. Increase expenses (Cost of goods sold) on the income statement and increase liabilities (Accounts payable) on the balance sheet.
   4. Decrease cash on the income statement and increase liability (account payable) on the balance sheet.

Please answer both questions. Thank you!

Answer 1

Ans:

1.

Sale of Inventory : $400

Cost of Inventory : $160

Profit : $400 -$160 = $240

Account Receivable : $400

Increase in Non current asset = Account receivable - Cost of Inventory

= $400 - $160 = $240

So it would increase non-cash assets by $240 on the balance sheet and increase retained earnings by $240 on the balance sheet.

Correct answer is option C.

2.

When we purchase inventory on credit it increase out current assets as inventory and current liability as account payable.

So it Increase liabilities (Accounts payable) on the balance sheet and increase assets on the balance sheet.

Correct answer is option B.

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