Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

1. Introduction to Accounting

Fundamental Accounting Equation

Financial Accounting

1. Introduction to Accounting

Fundamental Accounting Equation

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Multiple Choice

According to the fundamental accounting equation, if a company capitalizes tools with a purchase price greater than $1,000, which of the following is the correct effect on the company's financial statements at the time of purchase?

Expenses increase; assets remain unchanged.

Assets decrease; equity increases.

Liabilities increase; equity decreases.

Assets increase; liabilities or cash decrease by the purchase amount.

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Verified step by step guidance

Understand the fundamental accounting equation: Assets = Liabilities + Equity. This equation must always remain balanced.

Recognize that capitalizing tools means recording them as assets rather than expenses. This increases the company's assets because the tools are now part of the company's resources.

Determine how the purchase is financed. If the tools are purchased with cash, the cash account (an asset) decreases by the purchase amount. If financed through credit, liabilities increase by the purchase amount.

Analyze the impact on equity. At the time of purchase, equity remains unchanged because the transaction does not directly affect retained earnings or contributed capital.

Conclude that the correct effect on the financial statements is: Assets increase by the value of the tools, and either liabilities increase or cash decreases by the purchase amount, ensuring the accounting equation remains balanced.