In financial accounting, what does a stock represent?

• A. A liability owed to creditors
• B. An ownership share in a corporation
• C. A type of long-term debt instrument
• D. A contractual obligation to deliver goods

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of 'stock' in financial accounting. A stock represents an ownership share in a corporation, meaning it signifies partial ownership of the company by the shareholder.
2. Step 2: Differentiate between stocks and other financial instruments. Stocks are equity instruments, whereas liabilities owed to creditors, long-term debt instruments, and contractual obligations are not equity but rather debt or operational obligations.
3. Step 3: Recognize the rights associated with owning stocks. Shareholders typically have voting rights in corporate decisions and may receive dividends, which are a share of the company's profits.
4. Step 4: Note that stocks are classified into two main types: common stock and preferred stock. Common stockholders have voting rights, while preferred stockholders may have priority in receiving dividends but typically lack voting rights.
5. Step 5: Understand the role of stocks in financial accounting. Stocks are recorded in the equity section of a corporation's balance sheet, reflecting the ownership interest of shareholders in the company.