Final answer:
A company that raises $1,000 in equity to purchase PP&E records an increase in long-term assets on the balance sheet, with no immediate impact on profits. Over time, the purchased assets will depreciate and affect future profitability. This type of investment aims to improve productive capacity and lead to higher future returns.
Step-by-step explanation:
When a company raises $1,000 in Equity and uses it to purchase Property, Plant, and Equipment (PP&E), the accounting transaction reflects an exchange of two types of assets. The cash account decreases by $1,000, which is the equity raised, and the PP&E account increases by $1,000, representing the purchase of the new asset. This transaction does not immediately affect the company's profits, but it does alter the company's balance sheet by increasing its long-term assets. Over time, the PP&E will be subject to depreciation and the cost will be expensed on the income statement, affecting future profitability.
When businesses need to invest in their operations, they often raise financial capital by issuing stock to investors. This equity financing, compared to debt financing, does not require the company to make regular interest payments. However, the shareholders will expect some form of return on their investment, whether through dividends or capital gains from the appreciation of the stock value. The increased PP&E, assuming it's used effectively, can lead to higher productive capacity and potential profits in the long run.