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

When a company earns net income, its retained earnings:

Increase by the amount of net income, less any dividends declared

Are transferred to common stock

Remain unchanged

Decrease by the amount of net income

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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.

Recognize the relationship between net income and retained earnings: When a company earns net income, it increases retained earnings because the company has generated additional profit.

Account for dividends: If the company declares dividends, the amount of dividends is subtracted from the net income before it is added to retained earnings. This reflects the portion of profits distributed to shareholders.

Analyze the options provided: The correct answer is the one that states retained earnings increase by the amount of net income, less any dividends declared. This aligns with the accounting treatment of retained earnings.

Conclude that retained earnings are not transferred to common stock, do not remain unchanged, and do not decrease by the amount of net income. These options are inconsistent with the definition and behavior of retained earnings.