If a firm incurs a loss during a particular year, or if the firm had positive net income but paid out dividends more than the net income, what happens to the 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

When a firm incurs a loss or pays out more dividends than the net income, it reduces the retained earnings (RE) amount. This is because the firm is using up its accumulated earnings from the past, resulting in a decrease in the RE balance. Therefore, the correct choice is C, which states that the RE amount decreases.

If a Firm Incurs a Loss During a Particular Year