Effects of Transactions Upon the Accounting Equation

question 48

Essay

Effects of transactions upon the accounting equation
Listed below are selected transactions of Simon's,a retail store that uses a perpetual inventory system:
(a)Purchased merchandise on account.
(b)Made an entry to recognize the revenue from a sale of merchandise on account.(Ignore the cost of goods sold. )
(c)Recognized the cost of goods sold relating to the sale in Transaction b.
(d)Collected in cash the account receivable from the customer in Transaction b.
(e)Following the taking of a physical inventory at year-end,made an adjusting entry to record a normal amount of inventory shrinkage.
Indicate the effects of each of these transactions upon the elements of the company's financial statements.Organize your answer in tabular form,using the column headings shown below.(Notice that the cost of goods sold is shown separately from all other expenses. )Use the code letters I for increase,D for decrease,and NE for no effect.The answer for Transaction a is provided as an example.

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Definitions:

CAPM

Capital Asset Pricing Model; a formula used to determine the expected return on an investment, factoring in its risk relative to the market.

Risk-to-reward Ratio

A measure used by investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns.

Constant

A fixed value that does not change in mathematical equations or in the context of specific calculations.