Which of the following actions are most likely to directly increase cash as shown on a...

Which of the following actions are most likely to directly increase cash as shown on a firm’s balance sheet? Select the appropriate assumptions that underlie your answer.

a. It issues $5 million of new common stock.

b. It buys new plant and equipment at a cost of $3 million.

c. It reports a large loss for the year.

d. It increases the dividends paid on its common stock.

I. Statements (b) and (d) will increase the amount of cash on a company's balance sheet. Statement (a) will decrease cash through the sale of common stock. Selling stock uses cash from financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

II. Statements (b) and (d) will increase the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

III. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

IV. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will decrease cash through the sale of common stock. Selling stock uses cash from financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year.

V. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. Statement (c) would neither increase or decrease cash for taxes paid in a prior year.

Expert Solution

Answer is Statement 5

Issue of common stock is a financing activity. As new stocks are issued, firm will receive cash in return from those who buy the stock. This will increase equity on one side and cash balance on another side of balance sheet.

When a firm purchases a new plant or equipment, it would need to pay for the same. So, the fixed asset increases and same amount of cash would decrease.

A large loss reported this year may have no impact on cash balance this year.

When dividend is paid on common stock, it is paid using the cash account, so cash decreases on one side of balance sheet and dividend liability on other side of balance sheet.

jeff jeffy answered 2 years ago

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Which of the following actions are most likely to directly increase cash as shown on a...

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