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    Transactions effects to the income statement and balance she

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    The following three scenarios describe various practices that a company management team undertook to increase or decrease reported net income, the amount reported as assets and liabilities, or reported cash flow for the accounting period.

    Discuss the effects on the income statement, balance sheet, and cash flow statement for each of the following situations:

    Scenario 1: On July 16, the business owner took home, for personal use, office supplies that cost the company $478.

    Scenario 2: The company accepted a note from the chief executive officer and loaned him $50,000. But the note has no due date, and will only be repaid if the CEO is fired.

    Scenario 3: On December 15, a clerk ordered $15,000 of inventory to be delivered at the end of the year. The clerk asked the supplier to delay billing until the first of next year.

    Your answers should contain factual information for each situation.

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    Solution Preview

    The responses below will include what should have been done as opposed to an improper accounting for a transaction. It will be easier to understand the consequences if you set up T-accounts.

    1. a. An entry should have been prepared to debit Owner draw and credit Supplies inventory. If this was done, the effect is a reduction in owner's capital and a reduction in current assets. This entry would not affect the income statement at all, but both the balance sheet and cash flow would be impacted.

    b. If the Supplies inventory had already been expensed, the entry should have been to debit Owner draw and credit office expense. If this was the case, the effect is a reduction in owner's capital and a reduction in expense. The ...

    Solution Summary

    In a 508 word solution, the response explains the effects of the transactions on each of the financial statements.