Use the following information for questions 1-5: Stan's Surf Shack purchased five surfboards for $200 each. Later it purchased two additional surfboards for $250 each. Stan's sold a total of six surfboards during the period for $350 cash each. The company uses the perpetual inventory system and has not yet accrued any income taxes for the period. Indicate how the event described in the question affects the elements of the financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts. Increase = I Decrease = D No Effect = NA(Note that "No Effect" means that the event does not affect that element of the financial statements or that the event causes an increase in that element that is offset by a decrease in

Question

that same element.) Stan's sold the six surfboards for cash. The company uses the FIFO inventory cost flow method. (Consider the effects of both parts of this event.)AssetsLiabilitiesStk. EquityRevenuesExpensesNet IncomeStmt of Cash Flows???????

What will be an ideal response?

Answer 1

(I) (NA) (I) (I) (I) (I) (I) 
Recording the sale increases assets (cash) and stockholders' equity (retained earnings) by the selling price of the surfboards. It increases revenue, which increases net income by the same amount. Recording the cost of the merchandise sold decreases assets (inventory) and stockholders' equity (retained earnings). The expense (cost of goods sold) increases and net income decreases by the same amount. The net effect on assets and stockholders' equity is an increase to each by the difference between the selling price and the cost of the six surfboards. The cash received from the sale will be reported as a cash inflow from operating activities on the statement of cash flows.