Bart’s Brewskies has grown beyond its wildest dreams. They are now a corporation and have hired an accountant. Their income statement is now showing a net income. How is this income shown on the Statement of Retained Earnings?
I. It increases retained earnings.
II. It is shown as dividends paid to shareholders.
III. It does not impact the Statement of Retained Earnings.
Explanation
Answer - D - Net income impacts the Statement of Retained Earnings. The income is either kept by the corporation, which makes statement I a possibility, or it is paid out in dividends, which makes statement II a possibility.
Key Takeaway: The Statement of Retained Earnings shows the balance of the corporation’s retained earnings, which is the net income of the corporation that is not paid out as dividends to investors, such as shareholders. Retained earnings are used to reinvest within the corporation. The Statement of Retained Earnings is prepared after the Income Statement during the accounting cycle. It uses data from the Income Statement.
