Question

If the retained earnings account decreases from the beginning of the year to the end of the year, then

A) Net income is less than dividends

B) There was a net income and no dividends

C) Additional investments are less than net losses

D) Net income is greater than dividends

Answer 1

A decrease in the retained earnings account signifies that net income is less than dividends paid during the year, resulting in a reduction in the retained earnings.

Step-by-step explanation:

If the retained earnings account decreases from the beginning of the year to the end of the year, then the correct answer is A) Net income is less than dividends. Retained earnings represent the cumulative amount of net income that a company has retained rather than distributed to its shareholders in the form of dividends. When retained earnings decrease, it means the company has paid out more in dividends than it earned in net income for that period. This is in line with the general retained earnings formula:

Retained Earnings = Beginning Retained Earnings + Net Income - Dividends

If Net Income were greater than dividends, the retained earnings would increase, not decrease. Additional investments do not directly affect retained earnings as they are accounted for separately in the shareholders' equity. An economic situation where imports are greater than exports is unrelated to a company's retained earnings.