NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationHard
A financial analyst is comparing two companies using their financial statements. Company A has total assets of $500,000 and total liabilities of $200,000. Company B has total assets of $700,000 and total liabilities of $450,000. Which company has a higher owner's equity and by how much?
- ACompany A, by $100,000
- BCompany A, by $50,000
- CCompany B, by $100,000
- DCompany B, by $50,000
Show answer & explanationAnswer & explanation
Correct answer: B. Company A, by $50,000
Owner's Equity is calculated using the accounting equation: Assets = Liabilities + Owner's Equity, so Owner's Equity = Assets - Liabilities. For Company A: $500,000 - $200,000 = $300,000. For Company B: $700,000 - $450,000 = $250,000. Company A has higher equity ($300,000) than Company B ($250,000), by $50,000.
Why the other options are wrong
- A. This incorrectly states the difference in equity.
- C. This incorrectly states Company B has higher equity and the difference.
- D. This incorrectly states Company B has higher equity.
Owner's Equity
The owner's stake in the company, representing the residual value of assets after all liabilities have been paid.
- Also known as Shareholders' Equity or Stockholders' Equity.
- Calculated as Assets - Liabilities (from the accounting equation).
- Represents the capital invested by owners plus retained earnings.
Memory trick: Assets = Liabilities + Equity: 'A'll 'L'ots 'E'qual.