Multiple Choice
How does a corporation recognize a deficit in retained earnings on its balance sheet?
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12. Stockholders' Equity
Retained Earnings
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Stockholders' equity consists of which of the following?
A
Cash and accounts receivable
B
Accounts payable and notes payable
C
Common stock and retained earnings
D
Inventory and prepaid expenses
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 component of the balance sheet and reflects the residual interest in the company.
Identify the components of stockholders' equity: Stockholders' equity typically includes common stock, preferred stock (if applicable), additional paid-in capital, retained earnings, and sometimes treasury stock (which is subtracted). These items represent the ownership interest in the company.
Eliminate incorrect options: Cash and accounts receivable are classified as current assets, not stockholders' equity. Accounts payable and notes payable are liabilities, not equity. Inventory and prepaid expenses are also assets, not equity.
Focus on the correct components: Common stock represents the ownership shares issued by the company, and retained earnings represent the accumulated profits that have been reinvested in the business rather than distributed as dividends.
Conclude that stockholders' equity consists of common stock and retained earnings, as these are the correct components based on the definition and classification of equity in financial accounting.
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