Investments by stockholders have what effect on the fundamental accounting equation?

• A. Increase assets and increase stockholders' equity
• B. Increase liabilities and decrease stockholders' equity
• C. Decrease assets and increase stockholders' equity
• D. Increase assets and decrease liabilities

Answer: (A)

Verified step by step guidance

1. Understand the fundamental accounting equation: Assets = Liabilities + Stockholders' Equity. This equation must always remain balanced.
2. Recognize that investments by stockholders typically involve the contribution of cash or other assets to the business in exchange for ownership interest, which increases stockholders' equity.
3. Analyze the impact of stockholder investments on the equation: When stockholders invest, assets (e.g., cash) increase because the business receives resources, and stockholders' equity increases because the ownership interest grows.
4. Eliminate incorrect options: Investments by stockholders do not decrease assets or liabilities, nor do they decrease stockholders' equity. These options contradict the nature of stockholder investments.
5. Conclude that the correct effect of stockholder investments is an increase in assets and an increase in stockholders' equity, maintaining the balance of the fundamental accounting equation.