Which of the following best describes why a company issues stocks?

• A. To record cash inflows from operating activities
• B. To increase cash flows from investing activities
• C. To reduce its liabilities by paying off debts
• D. To raise capital by selling ownership shares to investors

Answer: (D)

Verified step by step guidance

1. Understand the concept of issuing stocks: Companies issue stocks to raise capital by selling ownership shares to investors. This provides the company with funds to finance operations, invest in growth, or pay off debts.
2. Clarify the purpose of issuing stocks: Issuing stocks is not directly related to recording cash inflows from operating activities, as these inflows come from the company's core business operations.
3. Distinguish between investing activities and issuing stocks: Cash flows from investing activities typically involve the purchase or sale of long-term assets, not the issuance of stocks.
4. Explain why issuing stocks does not directly reduce liabilities: While the funds raised can be used to pay off debts, the act of issuing stocks itself is not a mechanism to reduce liabilities.
5. Conclude that the correct reason for issuing stocks is to raise capital by selling ownership shares to investors, enabling the company to fund its activities and growth.