Financial statement effects for manufacturing versus service organizations
The following financial statements model shows the effects of recognizing depreciation in two different circumstances. One circumstance represents recognizing depreciation on a machine used in a factory. The other circumstance recognizes depreciation on computers used in a consulting firm. The effects of each event have been recorded using the letter (I) to represent increase, (D) for decrease, and (NA) for no effect.
Assets |
Equity |
||||||||||||||||
Event |
Cash |
+ |
Inventory |
+ |
Manuf. |
+ |
Office |
= |
Com. |
+ |
Ret. |
Rev. |
Exp. |
= |
Net Inc. |
Cash Flow |
|
1. |
NA |
I |
D |
NA |
NA |
NA |
NA |
I |
D |
NA |
|||||||
2. |
NA |
I |
D |
NA |
NA |
NA |
NA |
NA |
NA |
NA |
Required
a. Identify the event that represents depreciation on the computers.
b. Explain why recognizing depreciation on equipment used in a manufacturing company affects financial statements differently from recognizing depreciation on equipment used in a service organization.