Question

Over the period of a year, Julie’s net worth decreased. Which of the following could be true?
a.
Julie’s assets and liabilities decreased by the same amount.
b.
Julie’s assets and liabilities increased by the same amount.
c.
Julie’s assets increased by more than her liabilities.
d.
Julie’s assets decreased by more than her liabilities.

Answer 1

Net worth = assets − liabilities. A decrease in net worth means Δassets − Δliabilities < 0, i.e. Δassets < Δliabilities.

a. If both decrease by the same amount, Δassets = Δliabilities → net worth unchanged. Not possible.
b. If both increase by the same amount, Δassets = Δliabilities → net worth unchanged. Not possible.
c. If assets increased by more than liabilities, Δassets > Δliabilities → net worth increases. Not possible.
d. If assets decreased by more than liabilities, Δassets < Δliabilities → net worth decreases. This could be true.

Answer: d.