Multiple Choice
Which of the following is the correct formula to calculate total profit?
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4. Merchandising Operations
Net Sales
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Which of the following equations correctly summarizes how equity can be calculated?
A
Equity = Revenues - Expenses
B
Equity = Assets - Liabilities
C
Equity = Assets + Liabilities
D
Equity = Liabilities + Expenses
Verified step by step guidance1
Understand the concept of equity: Equity represents the residual interest in the assets of an entity after deducting liabilities. It is essentially what the owners of the business own outright.
Recall the fundamental accounting equation: Assets = Liabilities + Equity. Rearranging this equation to solve for equity gives Equity = Assets - Liabilities.
Analyze the options provided: The correct equation for equity is Equity = Assets - Liabilities, as it aligns with the fundamental accounting equation.
Eliminate incorrect options: Equity = Revenues - Expenses is incorrect because revenues and expenses are components of net income, not equity. Equity = Assets + Liabilities is incorrect because liabilities are subtracted from assets to calculate equity. Equity = Liabilities + Expenses is incorrect because expenses are not part of the equity calculation.
Conclude that the correct equation summarizing how equity can be calculated is Equity = Assets - Liabilities, based on the fundamental accounting principles.
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