Question

A company purchased supplies for cash, which will be consumed during future months. Which of the following correctly describes the impact of the supplies purchase on the financial statements?

a) Increase in assets and equity
b) Decrease in assets and equity
c) Increase in assets and decrease in equity
d) No impact on assets and equity

Answer 1

The purchase of supplies for cash results in an increase in one asset (supplies) and a decrease in another asset (cash), with no immediate change in equity.

Step-by-step explanation:

The purchase of supplies for cash by a company has impact on the financial statements in the following way: there is an increase in one asset (supplies) and a decrease in another asset (cash). Therefore, the correct answer is that there is an increase in assets and decrease in equity (since cash, which is part of equity, has been reduced).

To elaborate, when the supplies are bought, they are added to the balance sheet as a current asset, since they will be used in future business operations. At the same time, cash is reduced because it's used to pay for the supplies.

This transaction doesn't immediately affect the equity as it's an exchange of assets, though cash outflow can reduce the cash reserves that are part of equity.