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 the