Multiple Choice
Which of the following best describes the normal balances in stockholders' equity accounts?
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12. Stockholders' Equity
Retained Earnings
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Which of the following are the three main components that affect the balance of retained earnings on a company's balance sheet?
A
Common stock, additional paid-in capital, and treasury stock
B
Revenue, expenses, and cash flows from investing activities
C
Total assets, total liabilities, and stockholder contributions
D
Beginning retained earnings, net income (or loss), and dividends declared
Verified step by step guidance1
Understand that retained earnings represent the cumulative amount of net income earned by a company that has not been distributed to shareholders as dividends.
Recognize that the balance of retained earnings is affected by three main components: beginning retained earnings, net income (or loss), and dividends declared.
Beginning retained earnings is the retained earnings balance carried forward from the previous accounting period.
Net income (or loss) is calculated as revenues minus expenses for the current period, and it increases or decreases retained earnings accordingly.
Dividends declared represent the portion of retained earnings distributed to shareholders, which reduces the retained earnings balance.
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