Which of the following statements is true about retained earnings?
A)Retained earnings represents cash available to pay dividends to stockholders.
B)Retained earnings cannot be restricted by loan covenants.
C)Retained earnings generally consists of cumulative net income less any net losses and dividends since inception.
D)Retained earnings is reduced by the par value of stock splits.

Question

Quizplus · Accepted Answer

Retained earnings generally consists of cumulative net income less any net losses and dividends since inception. This means that it represents the portion of a company's profits that have been kept or retained for reinvestment and growth, rather than distributed as dividends to shareholders. Option A is incorrect because while retained earnings could be used to pay dividends, it does not necessarily represent cash available for dividends. Option B is also incorrect because loan covenants may restrict the use of retained earnings, especially if they are used as collateral for loans. Option D is incorrect because retained earnings are not affected by stock splits, which only affect the number of shares issued and outstanding.

Which of the Following Statements Is True About Retained Earnings