Finance (FINC) Test 1 Practice

If a firm finances an increase in assets entirely with new equity, what must occur?

Assets increase; Liabilities unchanged; Equity increases by same amount Assets decrease Liabilities increase Assets remain unchanged

Correct Answer:

Assets increase; Liabilities unchanged; Equity increases by same amount

Explanation:

When a firm finances an asset increase with new equity, the total assets rise and the owners’ claim (equity) rises by the same amount, while liabilities stay unchanged. This follows the accounting equation: assets = liabilities + equity. Issuing new equity adds cash or other assets and increases equity, so both sides of the equation grow by the same amount, keeping liabilities constant. So the asset side increases, liabilities remain unchanged, and equity increases by the same amount. The other scenarios would contradict the effect of issuing new equity.

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