Multiple Choice
Which of the following statements correctly represents the fundamental accounting equation?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which one of the following is a source of cash according to the fundamental accounting equation?
A
Issuing common stock
B
Paying off a loan
C
Declaring a cash dividend
D
Purchasing equipment
Verified step by step guidance1
Understand the fundamental accounting equation: Assets = Liabilities + Equity. This equation helps track the sources and uses of cash within a business.
Identify the impact of issuing common stock: When a company issues common stock, it increases equity and brings cash into the business, making it a source of cash.
Analyze paying off a loan: Paying off a loan reduces liabilities and uses cash, meaning it is not a source of cash but rather a use of cash.
Evaluate declaring a cash dividend: Declaring a cash dividend reduces retained earnings (part of equity) and uses cash, so it is not a source of cash.
Consider purchasing equipment: Purchasing equipment increases assets but uses cash, making it a use of cash rather than a source of cash.
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