Monday, September 7, 2009

Balance Sheet

All of the following are affected when a company issues common stock except:
A. working capital
B. current liabilities
C. net worth
D. total assets

EXPLANATION: think through a tough question like this logically. Ask yourself what happens when a company sells stock in an IPO. They take in cash, right? Cash is a current asset, which is part of working capital and, by definition, part of total assets. Choices A and D are eliminated. Net worth is usually called "stockholders' equity," but you have to be flexible to pass the Series 7. Since the par value of the stock is listed under "net worth/stockholders' equity", as well as the "paid-in surplus," reflecting the price of the stock in the IPO, you have to eliminate choice C-net worth.
If that approach doesn't work for you, ask yourself where the "liability" comes into play--is the company borrowing money? No. Even if they issued a bond, that would be a long-term liability, so you can safely go with choice B.


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