Which of the following statements is CORRECT?
A) If a firm reports a loss on its income statement, then the retained earnings account as shown on the balance sheet will be negative.
B) Since depreciation is a source of funds, the more depreciation a company has, the larger its retained earnings will be, other things held constant.
C) A firm can show a large amount of retained earnings on its balance sheet yet need to borrow cash to make required payments.
D) Common equity includes common stock and retained earnings, less accumulated depreciation.
E) The retained earnings account as shown on the balance sheet shows the amount of cash that is available for paying dividends.

Question

Quizplus · Accepted Answer

Retained earnings represent the portion of a company's net income that is not paid out as dividends, so a firm can have a large amount of retained earnings on its balance sheet but still need to borrow cash to make required payments. Option A is incorrect because a loss on income statement decreases retained earnings but it may not make it negative. Option B is incorrect because depreciation is a non-cash expense and has no direct impact on retained earnings. Option D is incorrect because accumulated depreciation is subtracted from asset values, not from equity. Option E is incorrect because retained earnings represent the portion of net income that is retained by the company and not distributed to shareholders as dividends, so it is not directly linked to cash available for dividend payments.

Which of the Following Statements Is CORRECT