Understanding Transactions Involving Issuance of Common Stock
Question:
Which of the following statements is true with regards to the transaction where Buffy Inc. issued shares of common stock to investors in exchange for cash contributions?
a. Buffy Inc. received cash and increased its retained earnings.
b. Buffy Inc. received cash and increased its shareholders' equity.
c. Buffy Inc. received common stock and increased its retained earnings.
d. Buffy Inc. received common stock and increased its shareholders' equity.
Answer:
The correct statement is option d. Buffy Inc. received common stock and increased its shareholders' equity.
Explanation:
When a company issues shares of common stock, it receives cash from investors in exchange for ownership in the company. This cash is recorded as an increase in cash on the balance sheet, and the issuance of common stock increases the shareholders' equity section of the balance sheet.
Issuing common stock is a common way for companies to raise capital for their operations and expansion. By offering ownership in the company to investors in exchange for cash, the company can strengthen its financial position and fund future growth opportunities.
It's important for companies to accurately record these transactions in their financial statements to provide transparency to investors and stakeholders about the company's financial health and performance. Shareholders' equity represents the total value of a company's assets that belong to its shareholders after deducting liabilities.
Overall, issuing common stock can be a strategic move for companies looking to raise funds and increase their shareholders' equity, thereby solidifying their financial foundation and potential for future success.