When a firm goes bankrupt, shareholders ______.

• A. automatically receive a portion of the firm's remaining assets before creditors are paid
• B. are required to pay the firm's outstanding debts from their personal assets
• C. may lose the value of their investment but are generally not personally liable for the firm's debts
• D. are guaranteed to recover their initial investment

Answer: (C)

Verified step by step guidance

1. Understand the concept of limited liability: In financial accounting, shareholders of a corporation have limited liability, meaning their financial risk is limited to the amount they have invested in the company. They are not personally responsible for the firm's debts.
2. Analyze the bankruptcy process: When a firm goes bankrupt, its remaining assets are distributed to creditors first, as they have priority over shareholders in the liquidation process.
3. Consider the implications for shareholders: Shareholders may lose the value of their investment in the firm because they are last in line to receive any remaining assets after creditors are paid.
4. Clarify personal liability: Shareholders are generally not personally liable for the firm's debts. Their liability is limited to their investment in the company, and they are not required to use personal assets to cover the firm's outstanding debts.
5. Review guarantees: Shareholders are not guaranteed to recover their initial investment in the event of bankruptcy. Their financial loss is limited to the value of their shares, but there is no assurance of asset recovery.