Which of the following is a source of shareholders' equity?

• A. Prepaid expenses
• B. Short-term loans
• C. Accounts payable
• D. Common stock issued by the company

Answer: (D)

Verified step by step guidance

1. Understand the concept of shareholders' equity: Shareholders' equity represents the owners' claim on the assets of a company after all liabilities have been deducted. It is composed of items such as common stock, retained earnings, and additional paid-in capital.
2. Review the options provided: Prepaid expenses, short-term loans, accounts payable, and common stock issued by the company. Determine which of these items directly contributes to shareholders' equity.
3. Analyze prepaid expenses: Prepaid expenses are assets, not part of shareholders' equity. They represent payments made in advance for goods or services to be received in the future.
4. Analyze short-term loans and accounts payable: Both are liabilities, meaning they represent amounts owed by the company to external parties. Liabilities do not contribute to shareholders' equity.
5. Identify common stock issued by the company: Common stock is a direct component of shareholders' equity. When a company issues common stock, it raises capital from shareholders, which increases the equity section of the balance sheet.