NASAA Series 65, Uniform Investment Adviser Law ExaminationEconomic Factors and Business InformationEasy
A financial analyst is evaluating a company's financial statements. They observe that the company's total assets are $500,000 and its total liabilities are $200,000. What is the company's owner's equity?
- A$700,000
- B$200,000
- C$500,000
- D$300,000
Show answer & explanationAnswer & explanation
Correct answer: D. $300,000
Owner's equity is calculated using the basic accounting equation: Assets = Liabilities + Owner's Equity. Rearranging this, Owner's Equity = Assets - Liabilities. So, $500,000 - $200,000 = $300,000.
Why the other options are wrong
- A. This would be the sum of assets and liabilities, which is not owner's equity.
- B. This represents the total liabilities, not owner's equity.
- C. This represents the total assets, not owner's equity.
Owner's Equity
The residual claim of the owners on the assets of the company after deducting liabilities.
- Represents the owners' stake in the company.
- Calculated as Assets - Liabilities.
- Also known as stockholders' equity or shareholders' equity for corporations.
Memory trick: Assets are like a house; Liabilities are the mortgage; Equity is what you truly own.