If a firm incurs a loss during a particular year, or if the firm paid out more in dividends than it had in net income, what happens to the retained earnings (RE) amount?
A) It increases.
B) It is unchanged.
C) It decreases.
D) It doubles.
E) It cannot be determined from the information given.

Question

Quizplus · Accepted Answer

Retained earnings represent the portion of a company's net income that is not paid out as dividends but is instead reinvested in the business. Therefore, if a firm incurs a loss or pays out more in dividends than it had in net income, the retained earnings amount will decrease.

If a Firm Incurs a Loss During a Particular Year