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

Which of the following statements about the book value of a firm's equity is correct?

The book value of equity is calculated as total assets minus total liabilities.

Retained earnings are not included in the calculation of book value of equity.

Book value of equity only includes common stock and preferred stock.

The book value of equity is always equal to the market value of equity.

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Verified step by step guidance

Understand the concept of book value of equity: It represents the net worth of a company as recorded in its financial statements. It is calculated as the difference between total assets and total liabilities.

Clarify the components of book value of equity: Retained earnings are included in the calculation of book value of equity because they are part of the equity section of the balance sheet.

Distinguish between book value and market value: The book value of equity is based on accounting records, while the market value of equity is determined by the stock market and can fluctuate based on investor sentiment and market conditions.

Identify the correct formula for book value of equity: \( \text{Book Value of Equity} = \text{Total Assets} - \text{Total Liabilities} \). This formula includes all equity components, such as common stock, preferred stock, and retained earnings.

Evaluate the given statements: The correct statement is that the book value of equity is calculated as total assets minus total liabilities. The other statements are incorrect because retained earnings are included in the calculation, book value includes more than just common and preferred stock, and book value is not always equal to market value.