Final answer:
It's false that a company's total equity will necessarily increase when investing idle cash in equity securities with less than 20% ownership because it's an asset exchange on the balance sheet.
Step-by-step explanation:
Impact of Investing in Equity Securities on Total Equity
When a company uses idle cash to invest in equity securities with less than 20% ownership, the statement that its total equity will increase is false. Initially, the investment is recorded at cost, which is an asset exchange transaction—cash decreases while investment in equity securities increases on the balance sheet. Total equity does not change due to this transaction. Only when dividends are received from the equity investment, or there are unrealized gains or losses under certain accounting standards, does equity change.
For dividends, they increase retained earnings, a component of equity. For unrealized gains or losses, under fair value through other comprehensive income (FVTOCI), they would affect other comprehensive income which is part of equity. However, selection of accounting treatment depends on factors such as the intention of holding the securities and the ability to influence the investee.
Comparatively, companies must choose carefully between raising funds through debt or equity. Borrowing or issuing bonds obligates the company to interest payments, impacting cash flows (liability financing). Issuing stock results in no obligation for payments except for the possible distribution of dividends (equity financing). Venture capitalists, a form of equity investors, can provide capital with the added benefit of potentially reducing information asymmetry due to their involvement in company management.
Therefore, the decision to invest in equity securities or engage in other forms of financing like issuing stock, borrowing, or issuing bonds can significantly impact a company's financial strategy and equity position.