Final answer:
The statement claiming corporations can restrict retained earnings or dividends without formal journal entries is false. Companies need to make formal entries to reflect financial decisions. The decision to reinvest or pay dividends can be influenced by various factors, including company size and investor oversight.
Option 'b' is the correct.
Step-by-step explanation:
The statement that many corporations restrict retained earnings or dividends without any formal journal entries is false. Retained earnings represent the cumulative amount of net income earned by a company that is retained by the company rather than distributed to shareholders as dividends.
In typical accounting practice, whenever a decision is made regarding dividends or the restriction of retained earnings, formal journal entries are required to accurately reflect these changes in a company's financial statements.
For example, when a board of directors declares a dividend, an entry is made to debit Retained Earnings and credit Dividend Payable. Restrictions or appropriations of retained earnings, often made for specific purposes such as future expansion or debt covenants, are also noted formally in the financial statements, though they do not always require a journal entry but must be disclosed.
Regarding a small company earning few or zero profits, the owners may decide to reinvest any earnings into the company rather than distributing dividends. When a company issues stock, unlike when it issues bonds, it does not have an obligation to make regular payments. Dividends can be seen as a discretionary payment. However, with respect to venture capitalists, who may inject capital into a company, they typically have greater oversight over management and strategic decisions given their substantial ownership and thus can influence whether a company retains earnings or pays dividends.