Question

Would the following activities increase or decrease the firm's cash balance?

a) Inventories are increased.
b) Accounts payable are decreased.
c) Additional common stock issued.
d) New equipment is purchased.

Answer 1

Activities that increase the firm's cash balance are increased inventories, decreased accounts payable, and purchasing new equipment. Additional common stock issued does not have a direct impact on the firm's cash balance.

Step-by-step explanation:

In this case, the activities that would increase the firm's cash balance are:

1. Inventories are increased: When inventories are increased, it means the firm has purchased more goods to sell. This would lead to an increase in the firm's cash balance as they would have to pay for the inventories.
2. Accounts payable are decreased: When accounts payable are decreased, it means the firm is paying off its debts. This would lead to a decrease in the firm's cash balance as they would be using their cash to pay off the debts.
3. New equipment is purchased: When new equipment is purchased, it means the firm is investing in its operations. This would lead to a decrease in the firm's cash balance as they would have to pay for the new equipment.

The activity that would not have a direct impact on the firm's cash balance is:

1. Additional common stock issued: When additional common stock is issued, it means the firm is raising capital by selling shares of stock to investors. While this activity does not directly increase or decrease the firm's cash balance, it does have an impact on the firm's overall financial position.