Canadian Securities Course (CSC) Level 1 Practice Exam

What items make up a company's equity?

1. Trade receivables and current liabilities.

2. Inventory and prepaid expenses.

3. Share capital and retained earnings.

4. Intangible assets and goodwill.

The correct answer is: Share capital and retained earnings.

The correct answer consists of share capital and retained earnings, which are fundamental components of a company’s equity. Share capital represents the total value of shares issued by the company, reflecting the ownership stake of its shareholders. It can include both common and preferred shares, which provide different rights and dividends to shareholders. Retained earnings signify the accumulated profits that a company has reinvested into the business instead of distributing to shareholders as dividends. This metric indicates the company’s ability to generate profit over time and its commitment to reinvest in its growth. Together, share capital and retained earnings provide a clear representation of a firm's equity, representing the financing provided by owners and the profits that have been retained for future use. Other options mentioned do not accurately represent equity. Trade receivables and current liabilities are parts of the balance sheet but relate to operations rather than ownership claims. Inventory and prepaid expenses are assets, while intangible assets and goodwill represent types of assets associated with a company’s reputation and intellectual property rather than direct equity components.