Financial Effects of Profit or Loss — Practice Questions

By Kenneth Boyd, Kate Mooney

Profit and loss affect your company’s total assets, total liabilities, and owners’ equity in different ways. Here are a couple of practice problems to show how this relationship works.

Practice questions

  1. Badabing only makes cash sales to its customers and pays all expenses in cash as incurred. During the year, sales were $53,000, and expenses were $42,000. What is the total impact on the financial position for the company as a result of operations during the past year?

  2. Badabing only makes credit sales to its customers and pays all expenses in cash as incurred. During the year, sales were $35,000, and expenses were $23,000. Collections from customers were $33,000. What is the total impact on the financial position for the company as a result of operations during the past year?

Answers and explanations

  1. Assets increased by $11,000, and total liabilities and owners’ equity increased by $11,000.

    Cash increased by $53,000 from sales and decreased by $42,000, for a net change of $11,000. This translates into a net increase of $11,000 in total assets. Owners’ equity increased by the amount of sales and decreased by the amount of expenses, so the net change is an increase of $11,000, which translates into an increase in total liabilities and owners’ equity of $11,000.

  2. Assets increased by $12,000, and total liabilities and owners’ equity increased by $12,000.

    Accounts receivable increased by $35,000 from sales and decreased by $33,000 from collections. Cash increased by $33,000 from collections and decreased by $23,000 from the payment of expenses, for a net increase in assets of $12,000. Owners’ equity increased by the amount of sales and decreased by the amount of expenses, so the net change is an increase of $12,000, which translates into an increase in total liabilities and owners’ equity of $12,000.

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