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

How does a corporation recognize a deficit in retained earnings on its balance sheet?

By recording it as a liability under current liabilities

By offsetting it against additional paid-in capital

By increasing the common stock account

By reporting a negative amount for retained earnings, often labeled as 'Accumulated Deficit'

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Verified step by step guidance

Understand the concept of retained earnings: Retained earnings represent the cumulative net income of a corporation that has not been distributed to shareholders as dividends. It is a key component of the equity section of the balance sheet.

Recognize what a deficit in retained earnings means: A deficit occurs when a corporation has accumulated losses over time, resulting in a negative retained earnings balance. This is often referred to as an 'Accumulated Deficit.'

Learn how it is reported on the balance sheet: Instead of recording it as a liability or offsetting it against other equity accounts, the deficit is reported directly in the equity section of the balance sheet as a negative amount under retained earnings. It may be labeled as 'Accumulated Deficit' to clearly indicate the negative balance.

Understand why it is not recorded as a liability: A deficit in retained earnings does not represent an obligation to external parties, so it cannot be classified as a liability. It reflects the internal financial position of the corporation.

Review the implications: Reporting an accumulated deficit signals financial challenges and may impact the corporation's ability to pay dividends or attract investors. It is important for stakeholders to understand this aspect of the financial statements.