Practice prompt · Q:transactions-to-statements/cash-uses-001

Cash payments with different accounting effects

Distinguish an asset purchase, an expense, and an owner's draw.

Updated Aug 6, 2026 Review due Nov 6, 2026

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A sole proprietorship begins with $30,000 Cash, no liabilities, and $30,000 equity. It pays $4,000 cash for equipment it still controls, pays $2,000 for utility service used in the current period, and pays its owner a $3,000 draw. Which classification is correct?

Choose the best answer. A Expense is $9,000, the owner's draw is $0, and ending equity is $21,000. B Expense is $2,000, the owner's draw is $3,000, and ending equity is $25,000. C Expense is $5,000, the owner's draw is $0, and ending equity is $25,000. D Expense is $2,000, the owner's draw is $3,000, and ending equity is $21,000.

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Answer: B

The $4,000 equipment purchase changes the asset mix but not total assets or equity at acquisition. The $2,000 utility service is expense. The $3,000 owner's draw is a distribution, not expense. Ending Cash is $21,000, Equipment is $4,000, and total assets and equity are $25,000.