Question

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.

1. It issues $7 million of new common stock.
2. It buys new plant and equipment at a cost of $3 million.
3. It reports a large loss for the year.
4. It increases the dividends paid on its common stock.

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.

-Select-

I

II

III

IV

V

Answer 1

Option III is correct.

b, results in cash outflow from the investing activities. d, dividends paid increases results in cash outflow from financing activities.

a, If a company issues new stock, they gets cashinflow through financing activties. c, In general tax slabs are different for companies and for income tax authorities. Hence, the taxes paid are not uniform through out the year. Sometimes, companies get tax refund if they paid more in prior year. So, in those cases, cash increases despite losses for the period.