Question

Vernon Manufacturing Company experienced the following accounting events during its first year of operation. With the exception of the adjusting entries for depreciation, assume that all transactions are cash transactions and that financial statement data are prepared in accordance with GAAP.

1. Acquired $53,000 cash by issuing common stock.
2. Paid $7,500 for the materials used to make its products, all of which were started and completed during the year.
3. Paid salaries of $3,600 to selling and administrative employees.
4. Paid wages of $6,700 to production workers.
5. Paid $6,100 for furniture used in selling and administrative offices. The furniture was acquired on January 1. It had a $1,300 estimated salvage value and a four-year useful life.
6. Paid $9,100 for manufacturing equipment. The equipment was acquired on January 1. It had a $1,500 estimated salvage value and a two-year useful life.
7. Sold inventory to customers for $26,400 that had cost $13,800 to make.

Required

Indicate how these events would affect the balance sheet and income statement by recording them in a horizontal financial statements model as indicated here. The first event is recorded as an example. (Enter any decreases to account balances with a minus sign. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), financing activity (FA), or NA for not affected.)

Answer 1

Affect of events on the balance sheet and income statement by recording them in a horizontal financial statements model are as indicated here

	Assets				Equity			Income statement				Cash Flow
Event Number	Cash +	Inventory +	Manufacturing Equipment +	Office Furniture	Common stock	+	Retained earnings	Revenue	-	Expense	Net Income
1	53,000				53,000							FA	Increase
2	-7,500	7,500										OA	Decrease
3	-3,600						-3,600			3,600	-3,600	OA	Decrease
4	-6,700						-6,700			6,700	-6,700	OA	Decrease
5a	-6,100			6,100								IA	Decrease
5b				-1,200			-1,200			1,200	-1,200	No effect
6a	-9,100		9,100									IA	Decrease
6b			-3,800				-3,800			3,800	-3,800	No effect
7a	26,400						26,400	26,400			26,400	OA	Increase
7b		-13,800					-13,800			13,800	-13,800	No effect