Which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

A firm may have a large amount of retained earnings on its balance sheet, but if it needs to make certain payments, such as debt payments or dividend payments, it may still need to borrow cash. Retained earnings may not be readily available as cash for payments. Choice A is incorrect because a loss on the income statement will reduce the retained earnings account but a negative retained earnings balance would only occur if prior years' losses exceeded prior years' profits. Choice B is incorrect because depreciation is a non-cash expense that reduces net income and, consequently, retained earnings. Choice D is incorrect because accumulated depreciation does not reduce common equity - it reduces the book value of the asset on the balance sheet. Choice E is incorrect because retained earnings is a cumulative total of net income that has been retained rather than paid out as dividends, and it is not the same as the amount of cash available for dividends.

Which of the Following Statements Is CORRECT