Multiple Choice
Which of the following are the three main components that affect the balance of retained earnings on a company's balance sheet?
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12. Stockholders' Equity
Retained Earnings
Multiple Choice
Which of the following are the two main components of stockholders' equity?
A
Common stock and retained earnings
B
Retained earnings and accounts payable
C
Dividends and cash
D
Preferred stock and notes payable
Verified step by step guidance1
Understand the concept of stockholders' equity: Stockholders' equity represents the owners' claim to the assets of a corporation after all liabilities have been deducted. It is a key section of the balance sheet.
Identify the main components of stockholders' equity: The two primary components are common stock (or preferred stock) and retained earnings. Common stock represents the initial investment by shareholders, while retained earnings are the accumulated profits that have been reinvested in the business rather than distributed as dividends.
Eliminate incorrect options: Accounts payable and notes payable are liabilities, not components of stockholders' equity. Dividends and cash are not part of stockholders' equity; dividends are distributions of retained earnings, and cash is an asset.
Focus on the correct answer: Common stock and retained earnings are the two main components of stockholders' equity. Preferred stock can also be part of stockholders' equity, but it is not mentioned in the correct pairing here.
Review the balance sheet structure: Stockholders' equity is typically divided into contributed capital (e.g., common stock) and earned capital (e.g., retained earnings). This reinforces why common stock and retained earnings are the correct components.
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