The Statement Of Retained Earnings (Or Owner's Equity) Uses Information From The

The correct answer of this mcq is (C), as Statement of Retained Earnings or Statement of Owner’s Equity is prepared after the preparation of Income Statement for the accounting period. It includes opening retained earnings, the ending retained earnings of previous accounting period, plus Net Income or minus Net Loss for the period, minus Dividend and final finding value is ending retained earnings of the current accounting period.

The formula used for calculating closing retained earnings is given below:

Closing RE = Opening RE + Net Income - Dividend

Opening RE shows the portion of profits retained in the last accounting period. Net income or Net Profit is the difference between total revenues minus total expenses for the period. In case of net loss, the total expenses are greater than total revenues and in the year of loss, dividend is not distributed to shareholders. The value of Ending RE shows the changes in the value of RE from the previous accounting period.

The company can use RE for carrying on business operations, incurring Capital Expenditures i.e., purchasing of non-current assets, for paying off its debts and for making investment purposes in order to stabilize, expand and grow the business. For the survival and continuity of the business, a company must have retained earnings otherwise, it shows that the company has not left net profits to retain which means that the business just covers all of its expenses with all of the revenues. So, in future, there is possibility that the business will not meet its expenses if revenues are declined and no retained earnings is available to meet remaining expenses and hence the business will suffer a loss and there is a need to stop some part of operations to cover loss.

The other options of this multiple choice question are irrelevant as Balance Sheet and Statement of Cash Flows are prepared after the preparation of statement of retained earnings while operating statement or statement of operation focuses only operating activities in more details but fails to give view on non-operating activities which the Income Statement shows.