Question

1. In 2007, AutoZone had a negative balance in its Retained Earnings and Shareholder’s Equity accounts. Is this an indication that the firm’s long-term survival is at stake? Should they place a priority on improving the negative positions in these 2 seconds? Explain.

Answer 1

Negative balance of Retained earnings and shareholders account -

Negative balance in retianed earnings mean the company has more losses than profits. It means the is incurred losses from past years and may be in current years instead of profits.

It can be indication of bankruptcy as the company incurred losses and thus may not have capacity to pay its loans, borrowings and other dues. It can be seen that payments to accounts payable also deferred due to non availability of liquidity.

It can be indication of company's not being going concern. But company can still servive if it is able to pay its dues on times and maintain its liquidity position by arranging loans or borrowings.

It is also called as accumulated deficits.

We can judge the company going concern by checking its future projects in hands and future possibilities and future plans to solve its negative earnings. As it is surely an indication of not being going concern but it alone cant judge the company's ability to be going concern.

In case of having negative retained earnings company must take steps to make its business profitable as in csse of high losses or losses from many company it not able to survive.

The steps that can be taken are as follows -

1. Taking more loans if it haivng the ability to repay it.

2. Taking more opportunities in business by extending it business segments which are having higher contribution margin.

3. By using more advanced technology which will lead to reduce the costs.

4. By issuing fresh capital or common stock.