Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Retained Earnings

Financial Accounting

12. Stockholders' Equity

Retained Earnings

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Multiple Choice

Who is entitled to the residual value of a firm's cash flows, which is typically represented by retained earnings?

Preferred shareholders

Bondholders

Common shareholders

Creditors

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Verified step by step guidance

Understand the concept of residual value: Residual value refers to the remaining cash flows of a firm after all obligations, such as expenses, taxes, and payments to creditors and preferred shareholders, have been met.

Recognize the role of retained earnings: Retained earnings are the portion of net income that is not distributed as dividends but is reinvested in the business or held for future use. These earnings belong to the owners of the company.

Identify the hierarchy of claims: Bondholders and creditors have priority claims on a firm's cash flows, as they are entitled to fixed payments or repayment of debt. Preferred shareholders have a claim on dividends before common shareholders but do not have rights to residual earnings.

Understand the rights of common shareholders: Common shareholders are the owners of the company and are entitled to the residual value of the firm's cash flows, which includes retained earnings. They bear the highest risk but also have the potential for the highest rewards.

Conclude that common shareholders are entitled to the residual value of a firm's cash flows, as they are the last in line to receive distributions after all other claims have been satisfied.