4. Explain briefly how each of the following transactions would affect a company

Question

4. Explain briefly how each of the following transactions would affect a company's balance sheet. (Remember, assets must equal liabilities plus owners' equity before and after the transaction.) a. Sale of used equipment with a book value of $300,000 for $500,000 cash. b. Purchase of a new $80 million building, financed 40 percent with cash and 60 percent with a bank loan. c. Purchase of a new building for $60 million cash. d. A $40,000 payment to trade creditors. e. A firm's repurchase of 10,000 shares of its own stock at a price o $24 per share f. Sale of merchandise for S g. Sale of merchandise for $120,000 on credit. h. A dividend payment to shareholders of $50,000.

Explanation / Answer

4)

A) Cash account will increase by 500,000; plant and equipment is going to decline by 300,000; and Shareholder’s equity will increase by $200,000.

B) Net plant and equipment increases by 80million; Cash declined by 32million and Notes payables increases by 48million.

C) Net plant and equipment rises $60 million; cash falls $60 million.

D) Cash falls $40,000; Accounts payable falls $40,000.

E) Cash falls $240,000; Owner's equity falls by $240,000 (via an increase in Treasury stock).

F) Cash rises $80,000; Inventory falls; Accrued taxes, Owners' equity, and possibly other cost categories rise such that the algebraic sum equals $80,000.

G) Accounts receivable rise $120,000. Other categories change as described in part f.

H) Cash falls $50,000. Owner's equity falls by $50,000 (via Retained Earnings).

5) Financial statements are constructed on an accrual basis rather than a cash basis because the accountants primary goal is to measure earnings, not cash generated. The accountant sees earnings as a fundamental indicator of viability, not cash generation. A more balanced perspective is that over the long run successful companies must be both profitable and have cash in the bank to pay their bills when due. This means that you should pay attention to both earnings and cash flows.

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