Final answer:
Stockholders' equity represents a residual claim against the firm's assets, meaning shareholders are entitled to the assets remaining after liabilities are paid. It's illustrated through the T-account model, with equity being total assets minus total liabilities.
Step-by-step explanation:
The stockholders' equity represents d. a residual claim against the firm's assets. This means that after all liabilities have been paid off in the event of liquidation, the shareholders are entitled to the remaining assets of the firm. It is residual because equity holders are paid after all debts and other financial obligations have been settled. The T-account model illustrates this well: total assets are on one side, total liabilities plus the net worth on the other, where net worth (or stockholders' equity) is the difference between the two. Thus, for a healthy business, the net worth will be positive, reflecting a value that's above and beyond what the company owes. Understanding the concept of stockholders' equity is essential for analyzing a company's financial health and for making informed investment decisions. It is important to note that stockholders' equity can fluctuate with the company's profitability, decisions made by management, and changes in the investment market.