Question

g3.7

Which of the following actions are most likely to directly increase cash as shown on a firm's balance sheet? Select the appropriate assumptions that underlie your answer. a. It issues $9 million of new common stock. b. It buys new plant and equipment at a cost of $3 million. c. It reports a large loss for the year d. It increases the dividends paid on its common stock. I. Statements (b) and (d) will increase the amount of cash on a company's balance sheet. Statement (a) will decrease cash through the sale of common stock. Selling stock uses cash from financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year II. Statements (b) and (d) will increase the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year. III. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year. IV. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will decrease cash through the sale of common stock. Selling stock uses cash from financing activities. On one hand, Statement (c) would decrease cash; however, it is also possible that Statement (c) would increase cash, if the firm receives a tax refund for taxes paid in a prior year. V. Statements (b) and (d) will decrease the amount of cash on a company's balance sheet. Statement (a) will increase cash through the sale of common stock. Selling stock provides cash through financing activities. Statement (c) would neither increase or decrease cash for taxes paid in a prior year.

Answer 1

Answer: Option-V: Statement (b) and (d) will decrease the amount of cash on firm's balance sheet; Statement (a) will increase cash through sale of common stock. Selling stocks provides cash through financing activities. On one hand, Statement (c) would neither increase or decrease cash for taxes paid in a prior year. Reason: Option-l & II are incorrect because when a firm buys a new plant & equipment, it has to pay cash and so firm's cash balance will decrease but it is given that option-(b) will increase cash on firm's balance sheet. Option-IV is incorrect because when a firm issues common stock, firm will receive cash in exchange of common stock. As a result, firm's cash balance will increase but it is given that option-(a) will decrease cash through issue of new common stock. Option-IIl is incorrect because when a firm suffers loss, it can carry forward such loss to a definite period of time to set off against profits that may be earned in future period. Also, if any taxes were paid directly or indirectly by the firm in current year, it can get them refunded due to loss sufferred in the current tax year but it is given that it is also possible that option-(c) would increase cash if a tax refund for taxes paid in prior year. Current year's loss doesn't have any impact on refund of taxes paid in prior year.