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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Which of the following statements concerning retained earnings is true?

  1. Retained earnings is the difference between revenues and expenses.
  2. Retained earnings is increased by dividends and decreased by net income.
  3. Retained earnings represents accumulation of the income that has not been distributed as dividends.
  4. Retained earnings is reported as a liability on the balance sheet.

To determine

Concept Introduction:

Financial statements: Financial statements are prepared to summaries the account at the end of the period. The statements prepared are Income statement, Balance sheet, Statement of owner’s equity and Cash flows statements.

Statement of Retained earnings:

Items reported on a retained earnings statement are explained as follows:

  • Beginning Balance of Retained earnings is the ending balance of the retained earnings of the previous year.
  • Net Income or Net loss is the amount of net income earned or net loss incurred for the year.
  • Dividends Paid are taken for the year.
  • Ending Balance of Retained earnings is calculated as follows:

Ending Balance of Retained earnings = Beginning Balance of Retained earnings + Net Income − Net income − Dividends Paid

To choose:

The true statement regarding the Retained earnings.

Explanation

Explanation for correct answer: Retained earnings represent accumulation of the income that has not been distributed as dividends. Hence option c is the right answer.

Explanation for incorrect answers:

a. Retained earnings represent accumulation of the income that has not been distributed as dividends...

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