The fact that equity represents an ownership interest and a residual claim against the net assets of an enterprise means that in the event of liquidation, creditors have a priority over owners in the distribution of assets.

Question

Quizplus · Accepted Answer

In the event of liquidation, creditors are paid before equity holders because creditors have a priority claim on the assets of the enterprise, while equity represents an ownership interest that is residual and subordinate to the claims of creditors.

The Fact That Equity Represents an Ownership Interest and a Residual