Final answer:
When merchandise is returned, it leads to a decrease in both assets (from the reversal of the sale or return of inventory) and stockholders' equity. This corresponds to choice a, where assets and stockholders' equity decrease. There is typically no immediate effect on liabilities.
Step-by-step explanation:
When merchandise is returned by customers to a retail store, it affects the store's accounting equation mainly by decreasing assets (the inventory is returned, and any cash or amount receivable from the sale is reduced) and decreasing stockholders' equity (through the recording of returns or sales discounts, which reduce net income). In this case, the impact on the accounting equation is that assets and stockholders' equity decrease, which corresponds to option a. Liabilities are generally not directly affected by customer returns unless the transaction involves a return of cash that was borrowed specifically for that sale, which is uncommon in practice.
The accounting equation, which is Assets = Liabilities + Stockholders' Equity, reflects a firm's financial position at a point in time. The return of goods will cause assets to decrease, as the inventory is returned back to stock, and cash or accounts receivable tied to the sale is decreased. Simultaneously, the equity decreases due to the loss of revenue or the cost associated with the returned goods.