The change in a firm's retained earnings is
A)the amount of cash that the firm has saved up.
B)the difference between the market price of the stock and the book value.
C)the difference between the net income earned and the dividends paid during a year.
D)the amount of directly contributed equity capital in excess of par value.

Question

Quizplus · Accepted Answer

Retained earnings represent the cumulative amount of net income earned by a company that has not been distributed as dividends to shareholders. Therefore, the change in retained earnings is the difference between the net income earned during a particular period and the amount of dividends paid out to shareholders during that same period. Option A is incorrect because cash savings do not necessarily equal retained earnings. Option B is incorrect because the market value of stock has nothing to do with retained earnings. Option D is incorrect because directly contributed equity capital in excess of par value represents additional paid-in capital, not retained earnings.

The Change in a Firm's Retained Earnings Is