Question

Bookmyer Company experienced a business event that affected its financial statements as indicated below. Balance Sheet: Assets = Liabilities + Equity. Income Statement: Revenue - Expenses = Net Income. Statement of Cash Flows: NA - NA + NA - NA. Which of the following events could have caused these effects?

1) A decrease in assets and an increase in liabilities
2) An increase in assets and an increase in equity
3) A decrease in revenue and an increase in expenses
4) No change in any of the financial statement categories

Answer 1

The student is given a scenario where there is no change indicated in the Balance Sheet or in the Income Statement, and they are asked to identify which business event could have caused these effects. The only event that aligns with this no-change scenario is option 4) No change in any of the financial statement categories.

Step-by-step explanation:

The question provided relates to a business event that has affected the financial statements of the Bookmyer Company. The financial statements affected include the Balance Sheet, where assets equal liabilities plus equity, the Income Statement, where revenue minus expenses equals net income, and the Statement of Cash Flows, which in this case was not affected (indicated as NA).

Considering the options provided:

1. A decrease in assets and an increase in liabilities would not cause the balance sheet equation to remain unchanged.
2. An increase in assets and an increase in equity usually indicates that the company earned more revenue, which would likely increase net income in the income statement - not an option as per the question.
3. A decrease in revenue and an increase in expenses would negatively impact net income, which would then reduce equity. This does not align with the no-change scenario presented in the question.
4. No change in any of the financial statement categories is the only event that could have caused the effects above, where all elements in the financial statements remain the same.

In conclusion, the event that could cause no change in asset, liability, and equity accounts on the balance sheet and no change in revenue and expenses on the income statement would be option 4).