Question

Accounting Question!

In reviewing the accounting equations for Company A and Company B shown below, explain which company is more risky and why:

   Assets = Liabilities + Owner's Equity

   Co. A    $500m = $400m + $100m   

   Co. B    $500m = $100m + $400m

Answer 1

Assets are always equals to our liabilities plus owner’s equity.

Assets = Liabilities + Owner's Equity

   Co. A    $500m = $400m + $100m   

   Co. B    $500m = $100m + $400m

Assets:

This will include tangible fixed assets, intangible fixed assets, investments and current assets

Liabilities: This will include current liabilities, long term liabilities, Borrowings etc.

Owner’s Capital: This is an investment value in capital of company.

If the organization dependency is more on owner’s capital than that organization will safe because there is very less interest cost to company and company will survive with less revenue also due to less interest cost

If the organization major dependency is on liabilities and borrowings than maximum revenue generated will be go interest cost to pay. In these case revenue will be go to negative if the interest cost is more and very high risk to sustain in market.

So as per given explanation co. A have major dependency is on liabilities and owner’s equity is very less so Co. A is more risky company compare to Co. B.

Answer= More Risky Co. = Co. A