Multiple Choice
Which of the following best describes the owner's rights to the assets of a business after all liabilities have been paid?
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12. Stockholders' Equity
Retained Earnings
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A company's past profits that are not paid out in dividends are known as:
A
Retained earnings
B
Paid-in capital
C
Dividends payable
D
Accumulated depreciation
Verified step by step guidance1
Understand the concept of retained earnings: Retained earnings represent the portion of a company's net income that is not distributed to shareholders as dividends but is instead reinvested in the business or held as reserves.
Differentiate between the options provided: Paid-in capital refers to the funds raised by the company from shareholders in exchange for stock, dividends payable are liabilities representing declared but unpaid dividends, and accumulated depreciation is a contra-asset account that tracks the total depreciation of assets over time.
Identify the key term in the question: The question specifies 'past profits that are not paid out in dividends,' which aligns with the definition of retained earnings.
Eliminate incorrect options: Paid-in capital, dividends payable, and accumulated depreciation do not match the description of past profits retained by the company.
Conclude that the correct answer is retained earnings, as it directly corresponds to the definition provided in the question.
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