Under GAAP: Understanding Changes in Assets, Liabilities, Equity

True Statements about GAAP

Prev Question Next Question

Question

Which of the following is/are TRUE under GAAP?

I. The change in the assets of a firm net of the change in liabilities represents a change in the total equity of the firm.

II. If the assets of the firm increase by $100 and liabilities remain unchanged, the common stock equity increases by $100.

III. A firm can increase its assets by borrowing money and keeping it as cash reserve.

IV. A firm can increase its equity by borrowing money and keeping it as cash reserve.

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

D

Use the basic equation, Assets = Liabilities + Total Equity.

II is false since you need "Total equity" comprises of common stock as well as other forms of equity like preferred issues. IV is false since the borrowing increases only the liabilities while the cash increases only the assets, leaving equity unchanged.

Prev Question Next Question