ABC IB Business Management Paper 1 Practice Test

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If the new factory investment is financed through equity, what is the likely effect on the balance sheet?

Non-current assets increase and equity increases; no interest expense.

Financing a factory with equity means you acquire a long-term asset and fund it with owners’ capital. On the balance sheet, this shows an increase in non-current assets (the factory) and an equal increase in shareholders’ equity (the funds raised). Because no borrowing is involved, liabilities don’t change and there’s no interest expense. The cash used to pay for the factory comes from the new equity, so the overall effect is higher non-current assets and higher equity, with no change in debt.

Current assets increase and debt increases.

Non-current assets decrease and equity increases.

There is no change in assets.