Final answer:
The prior year's balance of retained earnings can be changed by dividend payments and net income adjustments. Retained earnings are impacted by dividends that reduce the balance and by the company's net income, which can either increase or decrease. The option (A) is correct.
Step-by-step explanation:
Two things can change the prior year's balance of retained earnings: dividend payments and net income adjustments. This is because the retained earnings of a company represent the cumulative amount of net income that has been retained by the company rather than distributed to shareholders as dividends. Retained earnings are altered by the declaration and payment of dividends, which reduce the retained earnings by the amount paid out, and by the end-of-year net income or loss, which can increase or decrease the retained earnings accordingly.
It is important to understand that factors such as changes in stock prices, interest rates, economic downturns, market volatility, foreign exchange fluctuations, and trade policies can impact a company's operations and profitability, which in turn can affect the net income and thus indirectly influence retained earnings. For example, sharp movements in exchange rates can lead to significant changes in profits and losses for companies involved in international trade. Therefore,option (A) is correct.