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.

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 + Equity Rev - Exp = Net income Statement of cash flows

NA NA NA NA NA NA 100 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