When cash is spent in the acquisition of an asset, the net worth of the business is

• A. Unchanged
• B. Increased
• C. Decreased
• D. Not affected

Answer: (D)

When cash is spent to acquire an asset, you’re simply exchanging one asset for another. Cash decreases by the purchase amount, while the asset you acquire increases by the same amount. Total assets stay the same, and there are no changes to liabilities, so owners’ equity (net worth) remains unchanged at the moment of purchase. Over time, depreciation or impairment can affect net worth, but the immediate transaction itself does not change it. If the asset were bought on credit, liabilities would rise instead of cash, but net worth would still be unchanged at the time of purchase.