Hi, Here the company B reserves more prudently than company A. The solution states that the profitability of the companies depend upon whether they are growing or shrinking. I am not able to relate the growth of the company to the relative profitability described here. Can someone explain why Company B would appear more profitable as compared to A if the companies are shrinking ?
Hi there If the companies are shrinking then reserves will be released. As B reserves more prudently than A, then all other factors being equal, proportionately more reserves will be released from B which will make it appear more profitable than A. The converse will be true when they are both growing.
