The statement of retained earnings:
A Reports on amounts for assets, liabilities and equity at a point in time.
B Reports on cash flows for operating, financing and investing activities over a period of time.
C Reports how retained earnings changes over a period of time.
D Reports how retained earnings changes at a point in time.
E Reports on cash flows for operating, financing and investing activities at a point in time.
The correct answer and explanation is :
Correct Answer: C – Reports how retained earnings changes over a period of time.
Explanation:
The statement of retained earnings is a key financial document that shows how the retained earnings of a company have changed over a specific accounting period—which may be a month, quarter, or year. Retained earnings represent the cumulative amount of net income that a company retains, rather than distributing to shareholders as dividends.
This statement begins with the beginning retained earnings balance, adds the net income (or subtracts net loss) for the period, and then subtracts any dividends paid to shareholders. The result is the ending retained earnings balance, which is carried forward to the equity section of the balance sheet.
Here’s the typical format:
Beginning Retained Earnings
+ Net Income (or - Net Loss)
- Dividends
= Ending Retained Earnings
Why Option C is Correct:
- C correctly describes the purpose of the statement: tracking changes in retained earnings over a period of time.
Why Other Options Are Incorrect:
- A refers to the balance sheet, which reports assets, liabilities, and equity at a point in time, not over a period.
- B and E refer to the statement of cash flows, which details cash inflows and outflows from operating, investing, and financing activities. Option B is mostly accurate for cash flows, but not for retained earnings.
- D is incorrect because retained earnings change over a period, not at a specific point in time.
In summary, the statement of retained earnings is crucial for understanding how a company’s profits are retained and reinvested, helping stakeholders evaluate the business’s reinvestment strategy and profitability over time.