Financial assets-effects of transactions Five events involving financial assets

Question

Financial assets-effects of transactions

Five events involving financial assets are described below:

(a.) Sold merchandise on account.
(b.) Sold available for sale marketable securities at a gain. Cash proceeds from the sale were equal to the current market value of the securities reflected in the last balance sheet.
(c.) Collected an account receivable.
(d.) Adjusted the allowance for doubtful accounts to reflect the portion of accounts receivable estimated to be uncollectible at year-end.
(e.) Made the fair value accounting adjustment reducing the balance in the available for sale marketable securities account to reflect a decrease in the market value of securities owned.

Indicate the effects of each independent transaction or adjusting entry upon the financial measurements shown in the column headings below. Use the code letters, I for increase, D for decrease, and NE for no effect.

Transaction Current Assets Net Income Net Cash Flow (from any source)

Explanation / Answer

A. Sold merchandise on account - Increase Accounts receivable and decrease Inventory. Current assets and Net income increases because of the profit margin. It is a cash inflow from operating activity.

B. Sold available for sale marketable securities at a gain, Cash proceeds from the sale were equal to the current market value of the securities reflected in the last balance sheet - No effect on current assets and Net income increases because of the realized gain. It is a cash inflow from investing activity

C. Collected an account receivable - No effect on Current assets as Accounts Receivable decreases and Cash increases by the same amount. No effect on Net income. It is a cash inflow from operating activity.

D. Adjusted the allowance for doubtful accounts to reflect the portion of accounts receivable estimated to be uncollectible at year-end - Reduces the current assets and the net income. It does not effect cash flows.

E. Made the fair value accounting adjustment reducing the balance in the available for sale marketable securities account to reflect a decrease in the market value of securities owned - Reduces the current assets and Net income. It does not effect cash flows.

Transaction Current Assets Net Income Net Cash Flow (from any source) A I I I B NE I I C NE NE I D D D NE E D D NE

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