Question

Determining the Impact of Transactions, Including Analysis of Cash Flows

Vernon Company sells a wide range of goods through two retail stores operated in adjoining cities. Vernon purchases most of the goods it sells in its stores on credit, promising to pay suppliers later. Occasionally, a short-term note payable is used to obtain cash for current use. The following transactions were selected from those occurring during the fiscal year, which ends on December 31:

a. Purchased merchandise on credit for $18,000 on January 10.
b. Borrowed $45,000 cash on March 1 from City Bank by signing an interest-bearing note payable. The note is due at the end of six months (August 31) and has an annual interest rate of 10% payable at maturity.

Required:
Describe the impact of each transaction on the balance sheet equation.

Answer 1

Vernon Company

Determining the Impact of Transactions, Including Analysis of Cash Flows

Balance Sheet equation is Assets = Liabilities + Equity

a. January 10: Asset increased (Inventory) +$18,000 = Liabilities increased (Accounts Payable) +$18,000 + Equity

b. March 1: Asset increase (Cash) +$45,000 = Liabilities increased (10% Notes Payable) +$45,000 + Equity

Summary:

Assets = $63,000

Liabilities = $63,000

Equity = $0

Step-by-step explanation:

a) Data and Analysis:

January 10: Inventory $18,000 Accounts Payable $18,000

March 1: Cash $45,000 10% Notes Payable $45,000

b) The fundamental accounting equation, Assets = Liabilities + Equity, divides Vernon's balance sheet into two main sides. On one side are Vernon's assets and on the other side are its liabilities and equity. That is, the two sides of Vernon's balance sheet are always equal, provided the double-entry system of accounting is equally observed.