Practice question · True or false
If a firm's liabilities exceed its assets, its equity is negative and the owners' residual claim is worth nothing.
Hints
- The residual is what remains after subtracting the obligations.
- Ask what happens when the obligations exceed the resources.
Show the answer
True
Why
Equity = assets minus liabilities, so it goes negative exactly when creditor claims outgrow the resource pool.
Practise The Accounting Equation
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