The statement of changes in stockholders’ equity shows changes in which of the following accounts?

• A. Inventory and cost of goods sold
• B. Accounts payable and accrued expenses
• C. Cash and accounts receivable
• D. Common stock and retained earnings

Answer: (D)

Verified step by step guidance

1. Understand the purpose of the statement of changes in stockholders' equity: It is a financial statement that summarizes the changes in equity accounts over a specific period, including contributions from shareholders, distributions to shareholders, and retained earnings adjustments.
2. Identify the key equity accounts: Stockholders' equity typically includes accounts such as common stock, preferred stock, additional paid-in capital, retained earnings, and treasury stock.
3. Recognize that inventory, cost of goods sold, accounts payable, accrued expenses, cash, and accounts receivable are not equity accounts. These are part of assets, liabilities, or expenses, and are reported on other financial statements like the balance sheet or income statement.
4. Focus on the correct equity accounts: Common stock represents the ownership interest of shareholders, and retained earnings reflect the cumulative net income retained by the company after dividends are paid.
5. Conclude that the statement of changes in stockholders' equity specifically tracks changes in equity accounts such as common stock and retained earnings, as these are directly related to the ownership and profitability of the company.