Multiple Choice
Shareholders' equity is another common term for which of the following?
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1. Introduction to Accounting
Fundamental Accounting Equation
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
In the context of the fundamental accounting equation, current assets minus current liabilities equals:
A
Working capital
B
Owner's equity
C
Total assets
D
Net income
Verified step by step guidance1
Step 1: Recall the fundamental accounting equation, which is Assets = Liabilities + Owner's Equity. This equation forms the basis for understanding relationships between different financial components.
Step 2: Understand the concept of current assets and current liabilities. Current assets are short-term resources expected to be converted into cash within a year (e.g., cash, accounts receivable, inventory). Current liabilities are short-term obligations due within a year (e.g., accounts payable, short-term loans).
Step 3: Learn the definition of working capital. Working capital is calculated as Current Assets - Current Liabilities. It represents the liquidity available to a business for day-to-day operations.
Step 4: Analyze the options provided in the problem. The calculation of Current Assets - Current Liabilities aligns with the definition of working capital, not Owner's Equity, Total Assets, or Net Income.
Step 5: Conclude that the correct answer is 'Working capital,' as it directly corresponds to the formula Current Assets - Current Liabilities.
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