Which of the following would result when a company sells additional shares of their own stock in order to receive cash from new shareholders?

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BlackTom AI · Accepted Answer

Question restatement: The scenario describes a company selling additional shares of its own stock to obtain cash from new shareholders, and asks what would result from this action.
Option 1: A noncurrent liability and an investing cash flow are created. This is inaccurate because issuing new equity does not create a liability (like a loan or long-term debt); it also is not part of investing activities, which handle asset purchases and sales. So this mislabels both the account type and the cash flow category.
Option 2: A noncurrent liability and a financing cash flow are created. While the financing aspect is closer, the claim of a noncurrent liability is incorrect: issuing stock increases equity (common stock) rather than creating a liability; there is no obligation or payable created in exchange for cash from shareholders.
Option 3: Common stock increases and a financing cash flow results. This statement correctly identifies the accounting effects: equity (common stock) rises due to new shares being issued, and the cash inflow from investors is reported in financing activities on the statement of cash flows.
Option 4: Common stock increases and an investing cash flow results. Although common stock would increase, the cash flow classification is wrong here; the proceeds from issuing stock are not investing activities but financing activities. Investing activities relate to purchases and sales of long-term assets and investments, not equity issuance.

ACCT 2051 (070) Midterm Exam #1

Which of the following would result when a company sells additional shares of their own stock in order to receive cash from new shareholders?

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