Which of the following is a true statement regarding owners' equity?
A)APB Statement 4 and SFAC No. 6 both reflect the entity view of the firm.
B)Owners' equity consists of only two components: contributed capital and retained earnings.
C)In a sole proprietorship, there is no legal distinction between contributed capital and earned capital.
D)Dividends are legally paid only out of retained earnings.

Question

Quizplus · Accepted Answer

In a sole proprietorship, there is no legal distinction between the owner's or proprietor's contributed capital and earned capital. The proprietor is entitled to all the profits and bears all the losses. Therefore, the owner's equity consists of only one component in a sole proprietorship, which is the owner's capital. Option A is incorrect because APB Statement 4 reflected the fundamental concept of independence and objectivity when an auditor performs an audit of financial statements. On the other hand, SFAC No. 6 provided guidance on how the entity should define and report its performance to represent the economic activities. Option B is incorrect because owners' equity can consist of additional components like treasury stock, accumulated other comprehensive income, etc. Option D is also incorrect because dividends can be paid out of contributed capital or other reserves, depending on the entity's legal structure and provisions in the articles of association.

Which of the Following Is a True Statement Regarding Owners