Florida Building Contractor Business/Finance Practice Exam

What represents the residual interest in the assets of a company after deducting liabilities?

1. Net income

2. Net worth

3. Shareholder equity

4. Working capital

The correct answer is: Net worth

The correct answer is the term that refers to the residual interest in the assets of a company after deducting liabilities, which is known as shareholder equity. This concept is essential in understanding a company's financial position since it indicates the value that remains for the company's owners after all obligations have been settled. Shareholder equity is calculated using the formula: total assets minus total liabilities. This value indicates how much of the company's resources are funded by its owners as opposed to its creditors. It includes items such as common stock, preferred stock, additional paid-in capital, and retained earnings. While net worth could suggest a similar concept, it may imply a broader or personal financing view and does not specifically pertain to a company's equity structure. Working capital, on the other hand, refers to the difference between current assets and current liabilities, providing insight into a company's short-term financial health rather than its long-term value after settling debts. Net income reflects profitability over a specific period but does not capture the overall equity position of the company. Therefore, shareholder equity best encapsulates the residual interest aspect in a company's assets after liabilities are accounted for.