Amarillo Company experienced the following events during its first accounting period. (1) Purchased $5,000 of inventory on account. (2) Returned $50 of the inventory purchased in Event 1. (3) Sold the inventory for $6,000 cash. Based on this information, which of the following shows how the recognition of the return will affect the Company’s financial statements.

Answer 1 A.

Option 1

Balance Sheet    Income Statement    

Assets=Liab.+EquityRev.-Exp=Net Inc.Statement of cash flows

(50)  (50)  NANA  NA  NANA

Explanation:

Purchased return on account will decrease the assets (inventory balance) & also decrease the liability (Accounts payable). Income statement & cash flow statement are not affected.

Answer 1 A. $4,000

Explanation:

Inventory balance = Purchase - Purchase return

]= $5,000 - $1,000 = $4,000

Answer 1 C.

Option 4

Balance Sheet    Income Statement    

Assets=Liabs+EquityRev-Exp=Net incomeStatement of cash flows

NA  NA  NANA  NA  NA100 OA

Explanation:

Purchased return on cash will decrease the assets (inventory balance) & also increase the assets (Cash balance). Thus impact on assets are net off. Income statement & liability are not affected.

Decrease in inventory balance will increase the cash infow from operating activities of Statement of cash flows

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