Multiple Select Question
Select all that apply
Z Best, Inc. issued of common stock for cash. By accident, Best recorded the transaction by increasing cash and decreasing stockholders’ equity. As
a result of this entry, . (Check all that apply.)
assets are understated
the accounting equation is out of balance
stockholders’ equity is understated
common stock is understated

When Z Best, Inc. mistakenly recorded the issuance of common stock by decreasing stockholders’ equity instead of increasing it, several issues arise. By misclassifying the transaction, cash (an asset) does correctly increase, but the equity side reflects a decline, leading to a discrepancy. Hence, assets would be properly recorded but stockholders’ equity—representing ownership—gets an unwarranted decrease.

The resulting debacle means that stockholders’ equity is indeed understated because the common stock account, which should have increased, was mistakenly decreased. This error creates an imbalance in the accounting equation , leading to a situation where the total assets recorded do not reflect the real financial position of the company!