MPA701 T2 Topic 2 Review Questions PDF

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Chapter 3 Discussion questions 2 Which of the following is not possible? a One liability increases and another liability increases. b Shareholders’ equity increases and liabilities decrease. c Assets increase and liabilities decrease. A = L + OE a not possible, as the right hand side of the accounting equation will exceed the left hand side b possible, e.g. share capital issued to reduce debt c not possible, as the left hand side of the accounting equation will exceed the right hand side 3 Why does an increase in revenues result in an increase in shareholders’ equity? What other part of the accounting equation is likely to be affected? • Revenues increase profit, and profit increases retained profits, which is a part of shareholders’ equity. • It is likely that revenues (sales) also increase an asset, such as cash, or accounts receivable. 4 Why does an increase in expenses result in a decrease in shareholders’ equity? What other part of the accounting equation is likely to be affected? • Expenses decrease profit. A decrease in profit results in a decrease in retained profits. Retained profits are a category of shareholders’ equity, therefore, a decrease in retained profits, decreases shareholders’ equity. • The other parts of the accounting equation likely to be affected will either be an increase in liabilities (for example an increase in a payable when an expense is incurred) or a decrease in an asset (for example, when cash is paid out upon occurrence of an expense).

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