91Ó°ÊÓ

Use the accounting equation to record the effects of each of the following transactions on the firm's balance sheet (create separate columns for cash, inventory, and accounts payable): 1\. Purchased \(\$ 350,000\) of inventory on account, terms \(2 / 10,\) net \(30 .\) The firm records the inventory net of the discount. 2\. Paid the creditors in transaction 1 within the discount period. 3\. Purchased \(\$ 300,000\) of inventory on account, terms \(3 / 15,\) net \(45 .\) The firm records the inventory net of the discount. 4\. Purchased \(\$ 400,000\) of inventory, no terms, half for cash and half on account. 5\. Paid creditors the amount due from transaction 4. 6\. Paid the creditors in transaction 3 after the discount period.

Step by step solution

01

Transaction 1

This purchase of inventory on account increases inventory by \( \$350,000\) and increases accounts payable by the same amount. The 2% discount, if taken, will reduce these amounts. So, the initial entry is:Inventory: \(+\$350,000\),Accounts payable: \(+\$350,000\).

02

Transaction 2

Here, the firm pays the creditors within the discount period. This transaction reduces cash and accounts payable by the net payment amount. Therefore, the entries will be:Cash: \(-\$343,000\) (since there's a \(2\%\) discount on \(350,000\)),Accounts payable: \(-\$350,000\).

03

Transaction 3

This transaction is similar to transaction 1 but with different amounts and discount terms. The firm purchases more inventory on account which increases its inventory and accounts payable. The entries are:Inventory: \(+\$300,000\),Accounts payable: \(+\$300,000\).

04

Transaction 4

In this case, the inventory is purchased half with cash and half on account. So, this increases inventory and decreases cash by half the total amount, and it increases accounts payable by the other half. Record as:Cash: \(-\$200,000\),Inventory: \(+\$400,000\),Accounts payable: \(+\$200,000\).

05

Transaction 5

Then, the amount due from transaction 4 is paid, so cash and accounts payable decrease by the amount paid:Cash: \(-\$200,000\),Accounts payable: \(-\$200,000\).

06

Transaction 6

Finally, the firm pays creditors from transaction 3 but after the discount period, so the full amount is owed. The entries are:Cash: \(-\$300,000\),Accounts payable: \(-\$300,000\).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Balance Sheet

The balance sheet is like a snapshot of your firm's financial position at a specific point in time. It lists what the company owns (assets) and owes (liabilities), as well as the ownership interest (equity). In our exercise, the main focus is on how transactions affect assets like cash and inventory, and liabilities like accounts payable.

• Assets = What the company owns, like cash and inventory.
• Liabilities = What the company owes, like accounts payable.
• Equity = The ownership interest in the company, calculated as Assets - Liabilities.

Each transaction you perform adjusts these categories. When you buy inventory on account, your inventory (asset) increases, and so does your accounts payable (liability). Paying creditors reduces cash (asset) and accounts payable (liability). Managing these changes effectively is crucial to maintain a balanced and healthy financial status.

Inventory Management

Inventory management is the process of ordering, storing, and using a company's inventory. This includes managing raw materials, components, and finished products. It's crucial for ensuring you have enough goods without overstocking or overspending.
In transaction terms:

• When inventory is purchased, you increase your inventory value.
• Paying for this inventory involves managing cash flow and accounts payable.
• Taking advantage of purchase discounts (like in Transactions 1 and 3) can reduce the cost of inventory and improve profitability.

Efficient inventory management helps in keeping costs under control, meeting customer demand, and maximizing profits. It's about striking the right balance to avoid too much or too little inventory.

Accounts Payable

Accounts payable represents the short-term liabilities of a company. These are amounts a company needs to pay to its suppliers for goods or services purchased on credit. Managing accounts payable is essential because it affects cash flow and supplier relationships.

• Increased through purchases on account, as seen in Transactions 1, 3, and 4.
• Decreased when payments are made to creditors, as observed in Transactions 2, 5, and 6.
• A timely settlement, often within discount periods, can save money and maintain good relationships with suppliers.

Good practices involve tracking due dates, ensuring timely payments, and effectively utilizing discounts to enhance cash savings. This strategic management aids in maintaining liquidity and operational stability.

Financial Transactions

Financial transactions are acts involving the exchange of money or equivalent value. These transactions are the building blocks of financial accounting and are crucial in maintaining a firm's financial health and transparency.
For each transaction:

• Identify the affected accounts, whether they're assets like cash and inventory or liabilities like accounts payable.
• Record transactions accurately to reflect their impact on the balance sheet.
• Consider terms and conditions like payment terms (e.g., "2/10, net 30") to optimize financial decisions.

Understanding these transactions helps in tracking the company’s financial activities accurately, ensuring regulatory compliance, and making informed business decisions that support growth and sustainability.