Question

milo clothing experienced the following events during year 1, its first year of operation:

1. acquired $30,000 cash from the issue of common stock.
2. purchased inventory for $15,000 cash.
3. sold inventory costing $9,000 for $20,000 cash.
4. paid $1,500 for advertising expense.

required
use a horizontal financial statements model to show how each event affects the balance sheet, income statement, and statement of cash flows. more specifically, record the amounts of the events into the model. also, in the statement of cash flows column, classify the cash flows as operating activities (oa), investing activities (ia), or financing activities (fa).
note: enter any decreases to account balances and cash outflows with a minus sign. leave cells blank if no input is needed.
(table with accounting equation and effect of events on financial statements, with some entries filled and a note that answer is not complete)

Explanation:

Step1: Analyze Event 1

Acquiring cash from common stock issuance increases cash (asset) and common stock (stockholders' equity). Cash flow is financing (FA).
Cash: \(+30,000\), Common Stock: \(+30,000\), Statement of Cash Flows: \(30,000\) (FA)

Step2: Analyze Event 2

Purchasing inventory for cash decreases cash (asset) and increases inventory (asset).
Cash: \(-15,000\), Inventory: \(+15,000\)

Step3: Analyze Event 3a

Selling inventory for cash increases cash (asset) and revenue (increases retained earnings). Cash flow is operating (OA).
Cash: \(+20,000\), Revenue: \(+20,000\), Retained Earnings: \(+20,000\), Statement of Cash Flows: \(20,000\) (OA)

Step4: Analyze Event 3b

Cost of goods sold (COGS) decreases inventory (asset) and increases expenses (decreases retained earnings).
Inventory: \(-9,000\), Expenses: \(+9,000\), Retained Earnings: \(-9,000\)

Step5: Analyze Event 4

Paying advertising expense decreases cash (asset) and increases expenses (decreases retained earnings). Cash flow is operating (OA).
Cash: \(-1,500\), Expenses: \(+1,500\), Retained Earnings: \(-1,500\), Statement of Cash Flows: \(-1,500\) (OA)

Answer:

Event	Cash	+	Inventory	=	Common Stock	+	Retained Earnings	Revenue	-	Expenses	=	Net Income	Statement of Cash Flows
2.	\(-15,000\)	+	\(15,000\)	=	\(0\)	+	\(0\)	\(0\)	-	\(0\)	=	\(0\)
3a.	\(20,000\)	+	\(0\)	=	\(0\)	+	\(20,000\)	\(20,000\)	-	\(0\)	=	\(20,000\)	\(20,000\) (OA)
3b	\(0\)	+	\(-9,000\)	=	\(0\)	+	\(-9,000\)	\(0\)	-	\(9,000\)	=	\(-9,000\)	\(0\)
4.	\(-1,500\)	+	\(0\)	=	\(0\)	+	\(-1,500\)	\(0\)	-	\(1,500\)	=	\(-1,500\)	\(-1,500\) (OA)
Total	\(33,500\)	+	\(6,000\)	=	\(30,000\)	+	\(9,500\)	\(20,000\)	-	\(10,500\)	=	\(9,500\)	\(48,500\) (NC*)