Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Enter only one letter for each element.Increase = IDecrease = DNo Effect = NOn December 31, Year 1, Ravenswood Company made an annual payment on a long-term installment note payable. Show how this annual payment affected Ravenswood's financial statements.AssetsLiabilitiesEquityRevenuesExpensesNetIncomeCash Flow? ?????
What will be an ideal response?
(D) (D) (D) (N) (I) (D) (D)
Making a payment on an installment note decreases assets (cash) by the amount of the payment and decreases liabilities (notes payable) by the amount of the principal amortization. It increases expenses (interest expense) by the amount of the interest expense recognized, which decreases net income and equity. It is reported as a cash outflow for financing activities for the amount of the principal amortization, and for operating activities for the amount of the interest.
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