Question

Mr. Smith has assets of $320,000 and liabilities of $35,000. If he decides to pay cash for the entire amount of the purchase of a boat valued at $45,000, how would this decision affect Mr. Smith's assets?

A) Increase by $45,000
B) Decrease by $45,000
C) Stay the same
D) Increase by $10,000

Answer 1

Mr. Smith's decision to pay $45,000 in cash for the boat would result in a decrease in his cash assets by the same amount, although the total value of his assets remains the same due to the addition of the boat.

Step-by-step explanation:

When Mr. Smith decides to pay cash for the entire amount of the purchase of a boat valued at $45,000, this decision would result in his assets decreasing by $45,000. The transaction involves exchanging cash (one type of asset) for the boat (another type of asset), thus the total assets value remains the same until the cash is disbursed. After the payment, the cash portion of the assets decreases by $45,000, but this is offset by the addition of the boat as an asset of the same value, so the asset total ostensibly remains unchanged. However, the question focuses on the cash aspect of the assets, thus the correct answer to how the payment affects Mr. Smith's assets, specifically his cash, is that it would decrease by $45,000 (Option B).