Which of the following best describes the two sources of stockholders' equity?

• A. Amounts earned through profitable operations and amounts borrowed from banks
• B. Amounts received from issuing bonds and amounts paid as dividends
• C. Amounts invested by stockholders and amounts earned through profitable operations
• D. Amounts borrowed from creditors and amounts invested by stockholders

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of stockholders' equity. Stockholders' equity represents the owners' claim on the assets of a corporation after all liabilities have been deducted. It is a key component of the balance sheet and is derived from two primary sources.
2. Step 2: Identify the two sources of stockholders' equity. The first source is amounts invested by stockholders, which includes capital contributions such as proceeds from issuing common or preferred stock. The second source is amounts earned through profitable operations, which are retained earnings accumulated over time from net income.
3. Step 3: Eliminate incorrect options. For example, amounts borrowed from banks or creditors are liabilities, not stockholders' equity. Similarly, amounts received from issuing bonds are considered liabilities, not equity.
4. Step 4: Focus on the correct answer. The correct description of stockholders' equity is 'Amounts invested by stockholders and amounts earned through profitable operations,' as these are the two legitimate sources of equity.
5. Step 5: Reinforce the understanding by linking this concept to the accounting equation: \( \text{Assets} = \text{Liabilities} + \text{Stockholders' Equity} \). Stockholders' equity is the residual interest after liabilities are subtracted from assets.