What is true?

Question

Liabilities are the value of a company before obligations are paid.

Equity is the value of a company before obligations are paid.

Equity is the remaining value in a company after all liabilities have been paid.

Retained earnings are the value of the company.

Answer 1

Let’s evaluate each statement to determine which is true:

1. Liabilities are the value of a company before obligations are paid.

   • This statement is false. Liabilities represent the obligations of a company (amounts owed) and do not directly represent the value of the company.

2. Equity is the value of a company before obligations are paid.

   • This statement is also false. Equity represents the ownership interest in the company and is calculated after liabilities are subtracted from assets.

3. Equity is the remaining value in a company after all liabilities have been paid.

   • This statement is true. Equity is calculated as total assets minus total liabilities, representing the residual interest of the owners after all obligations have been settled.

4. Retained earnings are the value of the company.

   • This statement is false. Retained earnings represent the accumulated profits that have not been distributed as dividends and is a component of equity, but they do not represent the total value of the company.

In summary, the true statement is: Equity is the remaining value in a company after all liabilities have been paid.