Unit 3: Liabilities and Equity

Answer: A — Retained earnings increases when a company generates profit, known as Net income, which is the excess of revenues over expenses. Net income represents the amount of earnings left over after accounting for all costs, and it is added to retained earnings. In contrast, dividends declared reduce retained earnings, highlighting the direct impact of Net income on retained earnings growth. This addition of Net income to retained earnings allows a company to reinvest in its operations or distribute to shareholders.

Answer: C — Increase total stockholders' equity is correct because issuing preferred stock increases total stockholders' equity. Preferred stock is a component of stockholders' equity.

Answer: B — The current portion of long-term debt is classified as a Current liability, which refers to debts that must be paid within one year or within the company's operating cycle. This classification is appropriate because it reflects the company's short-term obligations. In contrast, Non-current liability is incorrect because it represents debts due beyond one year, whereas the current portion of long-term debt is due sooner.

Answer: C — According to the PPC model, increasing production of X will lead to a decrease in production of Y due to scarce resources.

Answer: A — When a company issues common stock, it receives cash from investors, which leads to an Increase in equity, as equity represents the ownership interest in the company. This Increase in equity occurs because the company's assets increase, and this excess is attributed to the shareholders, effectively increasing their claim on the company. In contrast, option B, Decrease in equity, is incorrect because issuing stock brings in new capital, not reduces it.