LO $1-3,1-4$

Exercise $1-12$A 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 equipment 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 for increase, D for decrease, and NA for no effect.

Balance Sheet Income Statement

Assets Stk$.$ Equity

Event No$.$ Cash $+$ Inventory $+$ BV Equip. $=$ C$.$ Stk$.+$ Ret. Ear. Rev. $$ Exp. $=$ Net Inc.

$1.$ NA $+$ NA $+$ D $=$ NA $+$ D NA $$ I $=$ D

$2.$ NA $+$ I $+$ D $=$ NA $+$ NA NA $$ NA $=$ NA

Required

Identify the event that represents depreciation on the computers.

Explain why recognizing depreciation on equipment used in a manufacturing company affects financial statements differently than recognizing depreciation on computers used in a service organization.