Question

Which of the following shows how paying cash to purchase supplies will affect a company's financial statements?

A. Balance Sheet Income Statement Statement of
Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
− NA − NA + − NA

B. Balance Sheet Income Statement Statement of
Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
− NA − NA NA NA −OA

C. Balance Sheet Income Statement Statement of
Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA NA NA NA NA NA NA

D. Balance Sheet Income Statement Statement of
Cash Flows

Assets = Liab. + Equity Rev. − Exp. = Net Inc.
NA NA NA NA NA NA −OA

Answer 1

Paying cash to purchase supplies will cause the cash asset on the balance sheet to decrease, but does not instantaneously affect the income statement until those supplies are used. The cash outflow will be represented in the Statement of Cash Flows under operating activities.

Step-by-step explanation:

The question is about understanding how the payment of cash to purchase supplies would affect a company's financial statements. When a company uses cash to purchase supplies, its assets decrease because the amount of cash (an asset) is reduced. On the other hand, its inventory of supplies increases (if we consider supplies as inventory), which is also an asset. If we assume that the supplies are consumed immediately and not capitalized, the total assets might remain unchanged. The cash outflow will also be reflected in the Statement of Cash Flows under operating activities as an outflow. There is no impact on the income statement in the instant case of the purchase, unless the supplies are immediately used and expensed.

Considering the information and based on the above explanation, the correct answer is:

• Balance Sheet: Assets decrease due to cash outflow.
• Income Statement: No immediate impact because it's a purchase of supplies; expense recognition occurs when it is consumed or used in the business operations.
• Statement of Cash Flows: There would be an outflow in the operating activities section.

Hence, the letter that best represents these effects is D.