Change in an asset is calculated as Last year balance minus This year balance; Change in a liability or equity is This year balance minus Last year balance. Which option correctly describes these formulas?

Change in an asset is calculated as Last year balance minus This year balance; Change in a liability or equity is This year balance minus Last year balance. Which option correctly describes these formulas?

• A. Asset change uses This year minus Last year; Liability uses Last year minus This year
• B. Asset change uses Last year minus This year; Liability uses This year minus Last year
• C. Asset change uses This year minus Last year; Liability uses This year minus Last year
• D. Asset change uses Last year minus This year; Liability uses This year minus Last year

Answer: (D)

This uses the sign convention that aligns with cash-flow effects on the balance sheet. For assets, increases use cash, so the change is defined as last year minus this year. If the asset rises, this year is higher and the result is a negative change, signaling a use of cash. For liabilities and equity, increases provide cash, so the change is defined as this year minus last year. If the liability/equity rises, the result is positive, signaling a source of cash. For example, if an asset grows from 100 to 120, the asset change is 100 minus 120 = -20, indicating a cash outflow of 20. If a liability grows from 100 to 140, the liability change is 140 minus 100 = 40, indicating a cash inflow of 40. Conversely, asset decreases yield positive changes, and liability decreases yield negative changes, consistent with their cash-flow implications. Thus, the correct description is: asset change uses last year minus this year; liability/equity change uses this year minus last year.

This uses the sign convention that aligns with cash-flow effects on the balance sheet. For assets, increases use cash, so the change is defined as last year minus this year. If the asset rises, this year is higher and the result is a negative change, signaling a use of cash. For liabilities and equity, increases provide cash, so the change is defined as this year minus last year. If the liability/equity rises, the result is positive, signaling a source of cash.

For example, if an asset grows from 100 to 120, the asset change is 100 minus 120 = -20, indicating a cash outflow of 20. If a liability grows from 100 to 140, the liability change is 140 minus 100 = 40, indicating a cash inflow of 40. Conversely, asset decreases yield positive changes, and liability decreases yield negative changes, consistent with their cash-flow implications.

Thus, the correct description is: asset change uses last year minus this year; liability/equity change uses this year minus last year.