Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is the consequence of having a strong owner’s equity?

1. It indicates a firm’s assets cannot cover its liabilities

2. It reflects business profit over a certain period

3. It signifies financial health and stability

4. It shows decreased cash holdings

The correct answer is: It signifies financial health and stability

Having a strong owner’s equity signifies financial health and stability for a business. Owner's equity represents the residual interest of the owners in the assets of the business after subtracting liabilities. When owner’s equity is strong, it usually indicates that the business has accumulated profits over time, has not incurred excessive debt, and possesses sufficient assets to meet its obligations. This financial strength is crucial for various reasons, including attracting investors, acquiring loans, and providing a buffer against potential financial difficulties. Strong owner’s equity often leads to better credit ratings, which can reduce borrowing costs and improve a company's ability to grow and invest in future opportunities. In contrast, the other options do not accurately reflect the implications of strong owner’s equity. For instance, a firm with strong owner’s equity would more likely have assets that can cover its liabilities, reflect business profits positively, and maintain cash holdings rather than show a decrease in them.