Question 1

Question

Where would you find the purchase of a new car, financed by a loan, in your three accounting documents?

Answer

Nothing would show up on the income statement, since the purchase is not an expense and the loan is not revenue.

On the balance sheet the car would show up as an increase in fixed assets, while the loan would show up as an increase in other liabilities. Please note that the increase in the assets are equal to the increase in liabilities.

Finally, in the cash flow statement, the purchase of the car would show up as a negative number in the investment section, indicating that cash was flowing out of the business. The loan would show up as a positive number in the finance section, indicating that cash was flowing into the business. There would be no net change in cash.

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