Which of the following is a way that a company can finance the purchase of assets?

• A. Writing off obsolete inventory
• B. Recognizing revenue from sales
• C. Issuing equity shares to investors
• D. Recording depreciation expense

Answer: (C)

Verified step by step guidance

1. Understand the concept of financing: Financing refers to the methods a company uses to raise funds to purchase assets or support operations. Common methods include issuing equity, taking loans, or using retained earnings.
2. Analyze the options provided: Writing off obsolete inventory, recognizing revenue from sales, and recording depreciation expense are not methods of financing. These are accounting actions that affect financial statements but do not directly raise funds.
3. Focus on the correct option: Issuing equity shares to investors is a valid financing method. When a company issues equity shares, it raises capital by selling ownership stakes to investors, which can then be used to purchase assets.
4. Explain why the other options are incorrect: Writing off obsolete inventory is an accounting adjustment to reduce the value of inventory. Recognizing revenue from sales is the process of recording income earned, not raising funds. Recording depreciation expense is an accounting entry to allocate the cost of an asset over its useful life, not a financing activity.
5. Conclude with the importance of equity issuance: Issuing equity shares is a common way for companies to finance asset purchases, as it provides immediate capital without incurring debt obligations.