Which of the following steps is inaccurate with respect to calculating a figure for shareholder's equity?
(a) Total liabilities must be subtracted from total assets.
(b) All dividends, be it for preferred or common shares, must be deducted from net income before it is added to the retained earnings component of shareholder's equity.
(c) Depreciation must be added back to net income before it is added on the retained earnings portion of shareholder's equity.
(d) All the capital that equity holders have invested into the firm must be added to the earnings that have been retained by the company over time.

The correct answer is c.
Depreciation is added back to net income only when calculating for cash flow. In the case of shareholder's equity, all figures are derived using accrual methods. Therefore, even though net income is at best only an estimate of the true economic profit of the firm, only dividends are deducted from it before it is added to retained earnings.
CFA Level 1 LOS: 7.1.A.j


  1. Donald has been putting aside money for his retirement into a Roth IRA for six years.  Although ...

    The correct answer is A) In a Roth IRA, there is no required distribution date as there is in a traditional IRA.
  2. A 7-year, 6% coupon callable bond is currently trading at 96.25.  The ...

    Free info on financial certification exams including study guides, exam questions, and much more!
  3. According to SEC Release IA-1092, which of the following would NOT qualify as an ...

    The correct answer is C). SEC Release IA-1092 considers financial planners, pension consultants and sports and entertainment ...
  4. Your client, Todd, owns 100 shares HAT stock in his taxable stock portfolio ...

    The correct answer is a): Since Todd owns the stock and expects another stagnant year ahead, he would employ a covered call ...
  1. No results found.

You May Also Like

Related Articles
  1. No results found.
Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!