Which one of the following correctly expresses the clean surplus relationship?
A) The change in book value per share is equal to earnings per share minus dividends.
B) The change in retained earnings is equal to net income.
C) The change in market value per share is equal to the change in book value per share.
D) The change in market value per share is equal to earnings per share minus dividends.
E) The rate of change in book value per share is equal to the firm's discount rate.

Question

Quizplus · Accepted Answer

The clean surplus relationship states that the change in book value per share is equal to earnings per share minus dividends. This relationship is considered "clean" because it excludes any other factors, such as changes in the value of assets or liabilities not reflected in the income statement. Option B is incorrect because the change in retained earnings may also include other items, such as adjustments for accounting standards or changes in fair value of assets. Option C and D are incorrect because the change in market value is not directly related to earnings or book value. Option E is incorrect because the firm's discount rate is not relevant to the clean surplus relationship.

Which One of the Following Correctly Expresses the Clean Surplus