CPIM Practice Exam

How is owners' equity calculated on a balance sheet?

1. Assets + Liabilities

2. Assets - Liabilities

3. Liabilities - Assets

4. Assets + Owners' Equity

The correct answer is: Assets - Liabilities

Owners' equity is calculated on a balance sheet as the difference between assets and liabilities. This fundamental equation of accounting is based on the principle that a company's resources (assets) are financed by debts (liabilities) and owners' equity. Therefore, when you subtract liabilities from assets, you arrive at the value that belongs to the owners of the company, thus accurately reflecting their stake in the business. This measure is essential for understanding the financial health and net worth of the company. The other options do not correctly represent how owners' equity is determined. The equation involving assets plus liabilities does not account for equity appropriately, and considering liabilities minus assets does not yield a meaningful financial measure. Lastly, adding assets to owners’ equity does not adhere to the core accounting equation and thus misrepresents the relationship between these accounts.