Final answer:
Net income increases stockholder equity by adding to the retained earnings, while net loss decreases stockholder equity by reducing the money available for stockholders' claims on the company's assets. Therefore, the correct answer to how net income and net loss affect stockholder equity is A. Increases; Decreases.
Step-by-step explanation:
The question asks how net income and net loss impact stockholder equity. Stockholder equity represents the owners' claim after subtracting total liabilities from total assets. Net income, being the profit after all expenses have been deducted, positively impacts stockholder equity. This is because when a company earns a profit, it retains these earnings, which increases the total equity. Conversely, a net loss will decrease stockholder equity because the company has made less money than it spent, which means there is less money remaining for the stockholders' claims on the assets.
In accounting terms, net income is added to the retained earnings part of the equity section of the balance sheet, while net losses are subtracted from it.