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02 Apr 2007, 10:02
Please, can anybody explain how to solve this question?
It is from the HBS exam which is required by my school.
On March 31, 2005, Cars Inc. owes Preston Devices, one of its suppliers, 25000usd for previous purchases. During April 2005, Preston sells Cars devices with a sales price of 10000usd and a cost to Preston of 8000usd. During April Cars pays Preston 12000usd against the amount owed to Preston. What is the effect of these April transactions on Preston’s balance sheet?
A) Accounts receivable increased be 2000,inventory decreased by 8000, cash increased by 12000, retained earnings increased by 12000
B) Cash increased by 12000, retained earnings decreased by 2000, inventory decreased by 10000, accounts receivable decreased by 12000
C) Cash increased by 2000, accounts receivable decreased by 2000, inventory decreased by 8000, retained earnings decreased by 12000
D) Cash increased by 12000, accounts receivable decreased by 2000, inventory decreased by 8000, retained earnings increased by 2000.
I was thinking about D, but "retained earnings bla bla...." is killing me. How could this transaction affect retained earnings?
P.S.: Gosh, accounting is soooo boring and convoluted. hate it