Which of the following equations is correct?
A) Net income = Shareholders' equity at the end of period t + Shareholders' equity at the beginning of period t (all other things being equal)
B) Net income = Shareholders' equity at the end of period t+1 + Shareholders' equity at the beginning of period t (all other things being equal)
C) Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t-1 (all other things being equal)
D) Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t (all other things being equal)

Question

Quizplus · Accepted Answer

Net income is the difference between revenues earned and expenses incurred during a particular period. Shareholders' equity at the end of the period t reflects the owners' investment in the company, and Shareholders' equity at the beginning of period t reflects the owners' investment at the start of the period. Therefore, the correct equation is Net income = Shareholders' equity at the end of period t - Shareholders' equity at the beginning of period t. Choice A is incorrect because it includes Shareholders' equity at the end of period t+1, which is not relevant to the period being considered. Choice B is incorrect because it includes Shareholders' equity at the end of the next period rather than the current period. Choice C is incorrect because it subtracts Shareholders' equity at the beginning of the previous period rather than the current period.

Which of the Following Equations Is Correct