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Which of the following is true about stockholders' equity? a This section of the Balance Sheet...

Which of the following is true about stockholders' equity?

a

This section of the Balance Sheet will always equal total assets.

b

This section of the Balance Sheet can only be increased if the company sells more stock to its stockholders.

c

Corporations always must have at least two accounts in this section of the Balance Sheet: common stock and retained earnings.

d

Retained earnings in stockholders equity is the one account on the Balance Sheet that the ending balance at the end of the period is zeroed out and does not carry over to the following period.

Solutions

Expert Solution

STOCK HOLDERS EQUITY

Stock holders equity is the net of a compan's total assets and total liabilities. In simple terms it refers to, the balance of assets after the payment of all of it's debts/liabilities. It refers the net worth of a company, helps to understand the financial strength of company.

Question : Truth about stockholders equity from the given options is :

correct option :( c ) corporations must have atleast two accounts in this section of the balance sheet: common stock and retained earnings.

Under double entry system of balancesheet preparation, it records all transactions in atleast two different accounts. Stockholder's equity has mainly 3 components : common stock, treasury stocks, retained earnings.

Incorrect option : ( a ) This section of the balance sheet will always equal total assets.

Stock holders equity is the net of total assets and total liabilities. It means that, stockholders equity represents total assets - total liabilities amount. It represents comapany's net assets. So option a is false

Incorrect option : ( b ) This section of balancesheet can only be increased if the company sells more stock to its stockholders.

The primary reason for increase in stockholder's equity is due to the increase in retained earnings. Stock holder's equity may increase from selling shareholders of stock, raising of revenues etc. So option b is also wrong.

Incorrect option : ( d ) Retained earnings in stockholders equity is the one account on the balance sheet that the ending balance at the end of the period is zeroed out and does not carry over to the following period.

Retained earnings carry forward each accounting year. So that the total of additional gains minus  dividends will be the retained earnings on balancesheet.

ekkarill92 answered 2 years ago
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