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

Previous problemNext problem

Struggling with Financial Accounting?

Join thousands of students who trust us to help them ace their exams!Watch the first video

Multiple Choice

Which of the following are the three main components that affect the balance of retained earnings on a company's balance sheet?

Common stock, additional paid-in capital, and dividends paid

Beginning retained earnings, net income (or loss), and dividends declared

Total assets, total liabilities, and net income

Revenue, expenses, and cash flows from operations

Previous problemNext problem

Verified step by step guidance

Step 1: 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 is reported on the balance sheet under shareholders' equity.

Step 2: Identify the components that affect retained earnings. Retained earnings are influenced by three main factors: (1) Beginning retained earnings, which is the balance carried forward from the previous period; (2) Net income (or loss) for the current period, which increases or decreases retained earnings; and (3) Dividends declared, which reduce retained earnings as they are distributed to shareholders.

Step 3: Eliminate incorrect options. For example, 'Common stock, additional paid-in capital, and dividends paid' are components of shareholders' equity but do not directly affect retained earnings. Similarly, 'Total assets, total liabilities, and net income' and 'Revenue, expenses, and cash flows from operations' are unrelated to the calculation of retained earnings.

Step 4: Focus on the correct answer. The correct components that affect retained earnings are Beginning retained earnings, Net income (or loss), and Dividends declared. These are the elements used in the formula for calculating retained earnings.

Step 5: Summarize the formula for retained earnings. The formula is: \( \text{Ending Retained Earnings} = \text{Beginning Retained Earnings} + \text{Net Income (or Loss)} - \text{Dividends Declared} \). This formula helps track changes in retained earnings over a period.