Which of the following are included in a firm's capital structure?

• A. Inventory and prepaid expenses
• B. Revenue and cost of goods sold
• C. Accounts receivable and cash
• D. Long-term debt and equity

Answer: (D)

Verified step by step guidance

1. Understand the concept of capital structure: Capital structure refers to the mix of debt and equity financing that a firm uses to fund its operations and growth. It typically includes long-term debt and equity, such as common stock, preferred stock, and retained earnings.
2. Analyze why inventory and prepaid expenses are not part of the capital structure: These are classified as current assets on the balance sheet and are related to the firm's operational activities rather than its financing structure.
3. Evaluate why revenue and cost of goods sold are excluded: Revenue and cost of goods sold are components of the income statement and represent the firm's operational performance, not its financing mix.
4. Consider why accounts receivable and cash are not included: These are also current assets and represent liquidity and operational resources, not the firm's long-term financing strategy.
5. Identify the correct components of capital structure: Long-term debt and equity are included because they represent the firm's financing sources used to support its operations and investments over the long term.