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If a business’s liabilities increase by $20,000 and capital falls by $5,000, what must be the change in total assets?
ANS: Increase of $15,000
Please explain.
I assume that you have watched my free lectures on this and will therefore know that the change in net assets over a period is always equal to the change in the capital over the period.
Given that the net assets is assets minus liabilities, if the assets had not changed then an increase of $20,000 in the liabilities would mean that the net assets (and so the capital) would have fallen by $20,000.
However the capital (and therefore the net assets) have only fallen by $5,000 and so the assets must have increased by $15,000. (15,000 increase and 20,000 decrease mean a net fall of $5,000).
If you have not watched my lectures then I suggest that you do. They are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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