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1. Which of the following statements is true about the
accounting equation?
a) It shows the relationship between assets, liabilities and
owner's equity.
b) It is derived from the double-entry system of accounting.
c) It is the basis for preparing the balance sheet.
d) All of the above.*
Rationale: The accounting equation is a fundamental
concept that expresses the relationship between the
resources of a business (assets), the claims of creditors
(liabilities) and the claims of owners (owner's equity). It is
also a result of applying the double-entry system of
accounting, which ensures that every transaction affects
two accounts in a balanced way. The accounting equation
is also used to prepare the balance sheet, which shows the
financial position of a business at a point in time.
2. What are the main components of owner's equity in a
corporation?
a) Common stock and retained earnings.*
b) Common stock and dividends.
c) Capital stock and net income.
d) Capital stock and dividends.
Rationale: Owner's equity in a corporation consists of two
main components: common stock and retained earnings.
Common stock represents the amount invested by the
shareholders in exchange for shares of ownership. Retained
earnings represent the accumulated net income of the
corporation that has not been distributed as dividends to theÂÂ
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