Multiple Choice
The primary objective of financial accounting is to:
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1. Introduction to Accounting
Fundamental Accounting Equation
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Which of the following is another common term for equity, excluding the use of the word 'shareholders'?
A
Retained earnings
B
Owner's equity
C
Total assets
D
Net income
Verified step by step guidance1
Understand the concept of equity: Equity represents the residual interest in the assets of an entity after deducting liabilities. It is essentially the ownership stake in the company.
Identify the term 'Owner's equity': Owner's equity is a common term used to describe equity, particularly in sole proprietorships or partnerships, where the owners directly hold the equity stake.
Differentiate between the options: Retained earnings are a component of equity but not synonymous with equity itself. Total assets represent the resources owned by the company, and net income is the profit earned during a specific period, neither of which are equivalent to equity.
Recognize the exclusion of 'shareholders': The problem specifies avoiding the term 'shareholders,' which is typically used in corporations. Owner's equity is a broader term applicable to various business structures.
Conclude that 'Owner's equity' is the correct term: Based on the explanation, 'Owner's equity' is another common term for equity, excluding the use of 'shareholders.'
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