When preparing a statement of cash flows, retained earnings adjustments are required so that which of the following are separated on the statement?
A) Revenue and cost.
B) Assets and liabilities.
C) Depreciation and purchases.
D) Net profits and dividends.

Question

Quizplus · Accepted Answer

Retained earnings adjustments are required in order to separate net profits and dividends on the statement of cash flows. This is necessary because net profits may include non-cash items such as depreciation or gains/losses on investments, which do not affect cash flows. By adjusting for these non-cash items, the statement of cash flows can provide a more accurate picture of a company's cash flow from operating activities. Separating dividends from net profits is also important because dividends represent a cash outflow to shareholders, which is a separate activity from the company's operating, investing, and financing activities.

When Preparing a Statement of Cash Flows, Retained Earnings Adjustments