Multiple Choice
Which of the following statements about the fundamental accounting equation is correct regarding a transaction for the sale of goods or services?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following, when subtracted by the explicit cost of production, results in accounting profit?
A
Total revenue
B
Total liabilities
C
Total assets
D
Owner's equity
Verified step by step guidance1
Understand the concept of accounting profit: Accounting profit is calculated as the difference between total revenue and explicit costs. Explicit costs are direct, out-of-pocket expenses incurred during production, such as wages, rent, and materials.
Identify the key term 'total revenue': Total revenue refers to the total amount of money generated from selling goods or services before any costs are deducted.
Recognize why explicit costs are subtracted: Explicit costs represent the actual expenses incurred in the production process, and subtracting them from total revenue gives a measure of profitability based on accounting standards.
Eliminate irrelevant options: Total liabilities, total assets, and owner's equity are balance sheet items and do not directly relate to the calculation of accounting profit. They are used for assessing financial position rather than profitability.
Conclude that subtracting explicit costs from total revenue results in accounting profit, as this aligns with the definition and formula for accounting profit.
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