Question

chen company established a $1,325 petty cash fund on january 1, year 1.
required:
a. is the establishment of the petty cash fund an asset source, use, or exchange transaction?
b. show the establishment of the petty cash fund in a horizontal financial statements model:
complete this question by entering your answers in the tabs below.
required a required b
show the establishment of the petty cash fund in a horizontal financial statements model.
note: in the statement of cash flows column, use the initials oa to designate operating activity, ia for investing activity, fa for financing activity, or leave blank for not affe
enter any decreases to account balances with a minus sign. leave cells blank if no input is needed.
chen company
statements model
balance sheet income statement
assets liabilities + stockholders revenue - expenses = net income
cash + petty cash equity
statement of cash
flows

Explanation:

Step1: Analyze the nature of the transaction

When a petty - cash fund is established, cash (an asset) is transferred to petty - cash (another asset). There is no change in the total amount of assets. It is an asset - exchange transaction.
For the horizontal financial statements model:

• Balance Sheet - Assets:
• Cash decreases by $1,325. So, in the Cash column, we enter \(- 1325\).
• Petty - Cash increases by $1,325. So, in the Petty - Cash column, we enter \(+ 1325\).
• Income Statement:
• There is no revenue, expense, or net - income impact. So, all columns (Revenue, Expenses, Net Income) are left blank.
• Statement of Cash Flows:
• Since it is an internal transfer of cash (from regular cash to petty - cash), and not related to operating (OA), investing (IA), or financing (FA) activities in the traditional sense (it is just a re - classification of cash within the company), it is left blank.

Answer:

a. Asset - exchange transaction.
b.

Balance Sheet				Income Statement			Statement of Cash Flows
\(-1325\)	\(+1325\)