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Retained Earnings quiz #2 Flashcards

Retained Earnings quiz #2
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  • What is the effect on retained earnings if a company earns net income but does not declare any dividends?
    Retained earnings increase by the amount of net income.
  • How does the payment of dividends in excess of retained earnings affect the equity section of the balance sheet?
    It creates a retained deficit, reducing total equity.
  • What is the role of retained earnings in financing company operations?
    Retained earnings can be used to finance operations, purchase assets, or fund expansion without needing external financing.
  • If a company’s retained earnings increase from one year to the next, what does this indicate?
    It indicates that the company earned more net income than it paid out in dividends or incurred in losses.
  • What is the main difference between retained earnings and paid-in capital?
    Retained earnings are accumulated profits not distributed as dividends, while paid-in capital is money invested by shareholders.
  • How can a company return to positive retained earnings after having a retained deficit?
    By earning net income in future periods and not paying out more dividends than profits.
  • What does it mean if a company has a positive retained earnings balance but not enough cash to pay dividends?
    It means the retained earnings may be invested in other assets and are not necessarily available as cash for dividend payments.
  • According to the base formula, what are the main additions and subtractions to the retained earnings account?
    Additions are the current year's net income, while subtractions include declared dividends and net losses.
  • What is a retained deficit and what does it indicate about a company's financial health?
    A retained deficit occurs when accumulated net losses or over-distributed dividends result in a negative retained earnings balance, indicating potential financial trouble.
  • How does net income and net loss affect the retained earnings T-account?
    Net income increases the retained earnings account (credit), while net loss decreases it (debit).