Question

When using the horizontal model, the arrow from net income to stockholders' equity indicates that: a) Net income increases stockholders' equity

b) Net income decreases stockholders' equity
c) Net income has no effect on stockholders' equity
d) Net income is unrelated to stockholders' equity

Answer 1

Net income increases stockholders' equity, reflecting reinvested earnings that add to the company's total value of equity.

Step-by-step explanation:

When using the horizontal model, the arrow from net income to stockholders' equity indicates that net income increases stockholders' equity. This is because net income represents the profit that a company has made over a certain period, which, after dividends have been paid, is retained within the business and adds to the stockholders' or shareholders' equity. This addition to equity essentially reflects the company's reinvested earnings, increasing the total value of equity in the business. This concept is a fundamental aspect of accounting and financial statements and is essential for understanding how the operations of a firm can impact the financial position from an owner's perspective.