Multiple Choice
Who is entitled to the residual value of a firm's cash flows, which is typically represented by retained earnings?
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12. Stockholders' Equity
Retained Earnings
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
The stockholders’ equity section of the balance sheet includes which of the following accounts?
A
Prepaid Expenses
B
Accounts Payable
C
Inventory
D
Retained Earnings
Verified step by step guidance1
Step 1: Understand the stockholders' equity section of the balance sheet. Stockholders' equity represents the owners' claim on the assets of the company after liabilities are deducted. It typically includes accounts such as common stock, additional paid-in capital, retained earnings, and treasury stock.
Step 2: Review the provided accounts: Prepaid Expenses, Accounts Payable, Inventory, and Retained Earnings. Determine which of these accounts belong to stockholders' equity. Prepaid Expenses, Accounts Payable, and Inventory are not part of stockholders' equity; they are classified under assets and liabilities.
Step 3: Focus on Retained Earnings. Retained Earnings is a key component of stockholders' equity. It represents the cumulative net income of the company that has been retained (not distributed as dividends) over time.
Step 4: Eliminate the incorrect options. Prepaid Expenses is an asset account, Accounts Payable is a liability account, and Inventory is an asset account. These do not belong to the stockholders' equity section.
Step 5: Conclude that Retained Earnings is the correct account that belongs to the stockholders' equity section of the balance sheet.
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