Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Retained Earnings

Financial Accounting

12. Stockholders' Equity

Retained Earnings

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Multiple Choice

Which of the following best describes how retained earnings reflect a change in owners' claims to resources?

Retained earnings only increase when new shares are issued to owners.

Retained earnings are unaffected by the company's net income or dividends.

Retained earnings increase when a company earns net income and decreases when dividends are paid.

Retained earnings decrease when a company borrows money from a bank.

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Verified step by step guidance

Understand the concept of retained earnings: Retained earnings represent the cumulative amount of net income that a company has earned and retained (not distributed as dividends) over time. It reflects the portion of owners' claims to resources that is reinvested in the business.

Analyze the relationship between net income and retained earnings: When a company earns net income, it increases retained earnings because the profit is added to the company's equity. This reflects an increase in owners' claims to resources.

Examine the impact of dividends on retained earnings: When a company pays dividends to its shareholders, it decreases retained earnings because the distributed amount is subtracted from the company's equity. This reflects a reduction in owners' claims to resources.

Evaluate the incorrect options: Retained earnings do not increase when new shares are issued to owners, as this transaction affects contributed capital, not retained earnings. Retained earnings are directly affected by net income and dividends, contrary to the second incorrect option. Borrowing money from a bank does not impact retained earnings; it affects liabilities instead.

Conclude with the correct description: Retained earnings increase when a company earns net income and decrease when dividends are paid. This accurately reflects how retained earnings change in response to the company's financial activities and owners' claims to resources.