Which of the following best describes the components of stockholders' equity?

• A. Common stock, retained earnings, and additional paid-in capital
• B. Cash, accounts receivable, and inventory
• C. Net sales, cost of goods sold, and gross profit
• D. Assets, liabilities, and revenues

Answer: (A)

Verified step by step guidance

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.
2. Identify the components of stockholders' equity: Stockholders' equity typically includes common stock, retained earnings, and additional paid-in capital. These elements represent the contributions from shareholders and the accumulated profits retained in the business.
3. Eliminate incorrect options: Cash, accounts receivable, and inventory are components of assets, not stockholders' equity. Net sales, cost of goods sold, and gross profit are components of the income statement, not stockholders' equity. Assets, liabilities, and revenues are broader categories and do not specifically describe stockholders' equity.
4. Focus on the correct components: Common stock represents the initial investment by shareholders. Retained earnings are the accumulated profits that have not been distributed as dividends. Additional paid-in capital refers to the amount shareholders paid above the par value of the stock.
5. Conclude that the correct description of stockholders' equity is: Common stock, retained earnings, and additional paid-in capital.