CPIM Practice Exam

Which equation represents the balance sheet structure?

1. Liabilities = Assets + Owners' Equity

2. Assets = Liabilities + Owners' Equity

3. Assets - Owners' Equity = Liabilities

4. Owners' Equity = Liabilities - Assets

The correct answer is: Assets = Liabilities + Owners' Equity

The balance sheet structure is fundamentally represented by the equation where assets equal the sum of liabilities and owners' equity. This reflects the accounting equation that ensures the financial stability of a company. In essence, assets represent everything a company owns and controls, while liabilities represent what it owes to external parties (creditors) and owners' equity indicates the residual interest of the owners in the company after liabilities are deducted from assets. By stating that assets equal the sum of liabilities and owners' equity, this equation shows that resources are financed either through borrowing (liabilities) or through investor contributions (owners' equity). This relationship is critical for understanding how a company's resources are funded and provides insights into financial health, indicating how well it can meet its obligations and the net worth available to shareholders.