Question

If total liabilities decreased by $4,000 then

A) stockholders' equity must have decreased by $4,000
B) assets must have decreased by $4,000, or stockholders' equity must have increased by $4,000
C) assets and stockholders' equity each increase by $2,000
D) assets must have increased by $4,000

Answer 1

If total liabilities decreased by $4,000, it means that the total amount owed by the company has decreased. In order to maintain the equation of accounting where Assets = Liabilities + Stockholders' Equity, there are a few possibilities: stockholders' equity must have increased by $4,000, or assets must have increased by $4,000, or assets and stockholders' equity each increase by $2,000

Step-by-step explanation:

If total liabilities decreased by $4,000, it means that the total amount owed by the company has decreased. In order to maintain the equation of accounting where Assets = Liabilities + Stockholders' Equity, there are a few possibilities:

A) stockholders' equity must have increased by $4,000

B) assets must have increased by $4,000, or stockholders' equity must have increased by $4,000

C) assets and stockholders' equity each increase by $2,000

D) assets must have decreased by $4,000

So, the correct answer is B. When total liabilities decrease, either assets increase or stockholders' equity increases or both.