Question

Suppose ABC company has revenue of $150 million this year, with total costs of $110 million. Assume no profits taxes. It decides to pay $25 million in dividends to owners, and use the rest of its profits to purchase new equipment and add to its cash. The more it spends on equipment, the lower its:

a) revenue b) profit c) addition to cash d) retained earnings e) both b) & c)

Answer 1

Whenever a company purchases a equipment, the below accounting entry holds true.

New equipment Account : Debit

Cash Account: Credit

As can be seen the equipment account increases and the cash account decreases with the purchase of equipment.

The other accounts i.e. revenue, profit and retained earnings as mentioned in the question does not get impacted with the purchase of the equipment.

Hence the correct answer is option c i.e. lower its addition to cash

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