Refer to the In Class Notes file and focus on the following image. Assume the Original Equity investment was $1,000,000. Because less Profit was made in this example than the one s... Refer to the In Class Notes file and focus on the following image. Assume the Original Equity investment was $1,000,000. Because less Profit was made in this example than the one shown in class, the balance of Total Liabilities and Net worth would:
Understand the Problem
The question is asking about the impact on Total Liabilities and Net Worth due to a decrease in profit, given original equity investment figures. Specifically, it wants to determine whether these values would stay the same, decrease, increase, or if neither option applies.
Answer
Decrease
The final answer is Decrease.
Answer for screen readers
The final answer is Decrease.
More Information
In accounting, reduced profits decrease the net worth since profits add to equity through retained earnings. This impacts the Total Liabilities and Net Worth by decreasing it if profit is less than anticipated.
Tips
A common mistake is not considering that reduced profits diminish the equity part of the balance sheet.
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