Question

Garrison Company acquired $23,000 by issuing common stock. Which of the following choices accurately reflects how this event affects the company's financial statements?

Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash Flow
A. 23,000 = NA + 23,000 NA − NA = NA 23,000 FA
B. 23,000 = NA + 23,000 23,000 − NA = 23,000 23,000 FA
C. 23,000 = 23,000 + NA 23,000 − NA = NA 23,000 FA
D. 23,000 = 23,000 + NA 23,000 − NA = 23,000 23,000 OA

a. Option A
b. Option B
c. Option C
d. Option D

Answer 1

Option A is the correct answer

Step-by-step explanation:

The effects of issuing common stock for cash can be represented as follows,

• An increase in assets of $23000

• No effect on Liability or debt

• An increase in equity of $23000

• No effect on either Revenue or Expenditure

• An increase in cash flow for $23000

The issuance of common equity for cash results in an increase in cash account which is an asset account. Thus, the amount or balance of asset account increases by the amount of cash received.

The issuance of common equity also increases the capital/equity account or section of the balance sheet. Apart from this no other account is affected by this transaction and as this transaction results in a cash inflow for $23000, the net increase in cash flow is also $23000. Thus, option A is the correct answer.