Chp . 8.1 - understanding retained earning

Question 1

define retained earnings

Answer 1

represents the cumulative mount of net income left over after dividends have been paid to the shareholders

Question 2

______ is the key link between income statement and balance sheet

Answer 2

retained earnings

Question 3

define accumulated deficit

Answer 3

the cumulative losses that a company generates over time

Question 4

why are accumulated deficits more commonly seen in newer companies

Answer 4

significant expenses may be incurred for the first few years before the company starts generating any meaningful revenue

Question 5

what’s the formula for the statement of retained earnings

Answer 5

opening retained earnings + net income/(loss) - dividends = closing retained earnings

Question 6

why do dividends reduce the amount of retained earnings?

Answer 6

dividends represent a payments of company profits to the owners

Question 7

what’s the journal entry for dividends that are declared but not paid?

Answer 7

Dr. Dividends
Cr. Dividends payable

Question 8

what’s an exception to this statement: “if no dividends are declared during the period, there will be no dividends line item on the statement of retained earnings”

Answer 8

exception: unless dividends were declared in a comparative period and both period are shown on the financial statement

Question 9

how to close net income into retained earnings (using temporary accounts)

Answer 9

book a journal entry in the opposite direction

Dr. revenue
Cr. expenses
Cr. Retained earnings

Question 10

what statements are true for the journal entry to close net income into retained earnings

Answer 10

• journal entry balances
• amount credited to retained earnings = net income for the period
• retained earnings is credited + retained earnings is an equity account
• after posting the journal entry, all the revenue and expenses accounts would have balances of 0 for the next fiscal year