Complete these practice problems. Check your answers after you finish. Indicate whether each of the following statements is true or false. Select the best answer for each of the following questions. 1. Which of the following accounts is least likely to be adjusted on the work sheet? a. Supplies on Hand. b. Land. c. Prepaid Rent. d. Unearned Delivery Fees. 2. If the Balance Sheet columns do not balance, the error is most likely to exist in the: a. General journal. b. General ledger. c. Last six columns of the
work sheet.Self-test
True-false
Multiple-choice
d. First six columns of the work sheet.
3. Net income for a period appears in all but which one of the following?
a. Income Statement debit column of the work sheet.
b. Statement of Retained Earnings credit column of the work sheet.
c. Statement of retained earnings.
d. Balance sheet.
4. Which of the following statements is false regarding the closing process?
a. The Dividends account is closed to Income Summary.
b. The closing of expense accounts results in a debit to Income Summary.
c. The closing of revenues results in a credit to Income Summary.
d. The Income Summary account is closed to the Retained Earnings account.
5. Which of the following statements is true regarding the classified balance sheet?
a. Current assets include cash, accounts receivable, and equipment.
b. Plant, property, and equipment is one category of long-term assets.
c. Current liabilities include accounts payable, salaries payable, and notes receivable.
d. Stockholders' equity is subdivided into current and long-term categories.
April 29, 2022/ Steven Bragg
The statement of retained earnings reconciles changes in the retained earnings account during a reporting period. It is useful for understanding how management utilizes the profits generated by a business. The statement begins with the beginning balance in the
retained earnings account, and then adds or subtracts such items as profits and dividend payments to arrive at the ending retained earnings balance. The general calculation structure of the statement is: Beginning retained earnings + Net income - Dividends = Ending retained earnings The statement of retained earnings is most commonly presented as a separate statement, but can also be appended to the bottom of another financial statement. A key advantage of the statement of retained earnings is that it shows how management chooses to redirect the retained earnings of a business. It may indicate that funds are being allocated to the acquisition of more assets, or perhaps sent to investors in the form of dividend payments. Thus, it can provide a general indication of how management wants to use excess funds. The following example shows the most simplified version of a statement of retained earnings:What is the Statement of Retained Earnings?
Advantages of the Statement of Retained
Earnings
Example of the Statement of
Retained Earnings
Arnold Construction Company
Statement of Retained Earnings
for the year ended 12/31x2
Retained earnings at December 31, 20X1 | $150,000 |
Net income for the year ended December 31, 20X2 | 40,000 |
Dividends paid to shareholders | -25,000 |
Retained earnings at December 31, 20X2 | $165,000 |
It is also possible to provide a greatly expanded version of the statement of retained earnings that discloses the various elements of retained earnings. For example, it could separately identify the par value of common stock, additional paid-in capital, retained earnings, and treasury stock, with all of these elements then rolling up into the totals just noted in the last example. Here is a sample of a more expanded statement of retained earnings:
Arnold Construction Company
Statement of Retained Earnings
for the year ended 12/31x2
Common Stock, $1 Par | Additional Paid-In Capital | Retained Earnings | Total Shareholders’ Equity | |
Retained earnings at December 31, 20X1 | $10,000 | $40,000 | $100,000 | $150,000 |
Net income for the year ended December 31, 20X2 | 40,000 | 40,000 | ||
Dividends paid to shareholders | -25,000 | -25,000 | ||
Retained earnings at December 31, 20X2 | $10,000 | $40,000 | $115,000 | $165,000 |
The statement is most commonly used when issuing financial statements to entities outside of a business, such as investors and lenders. When financial statements are developed strictly for internal use, this statement is usually not included, on the grounds that it is not needed from an operational perspective.
Terms Similar to the Statement of Retained Earnings
The statement of retained earnings is also known as the retained earnings statement, the statement of shareholders' equity, the statement of owners' equity, and the equity statement.