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

What is the effect of net income on retained earnings?

Net income is recorded as a liability, not affecting retained earnings.

Net income has no effect on retained earnings.

Net income decreases retained earnings.

Net income increases retained earnings.

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Verified step by step guidance

Understand the relationship between net income and retained earnings: Retained earnings represent the cumulative amount of net income that a company has retained (not distributed as dividends) over time.

Recognize that net income is calculated on the income statement and reflects the profitability of the company during a specific period.

Learn that at the end of the accounting period, net income is transferred to the retained earnings account on the balance sheet, increasing its balance.

Note that retained earnings are part of stockholders' equity, not liabilities, and net income directly contributes to the growth of this equity component.

Conclude that the correct answer is: Net income increases retained earnings, as it adds to the company's accumulated profits.