How does the change in the cash balance for the year impact the computation of the ending retained earnings balance?

How does the change in the cash balance for the year impact the computation of the ending retained earnings balance?

• A. It is ignored.
• B. It is added to beginning retained earnings.
• C. It increases net income.
• D. It reduces total assets.

Answer: (A)

Ending retained earnings is carried forward from the beginning balance by adding net income for the period and subtracting dividends. The year’s change in cash is not part of that calculation; it appears on the balance sheet as a change in the cash asset and on the cash flow statement, not as a direct input to retained earnings. Net income increases retained earnings because it represents earnings that the company keeps, while dividends paid reduce retained earnings. If cash paid for dividends occurs, it affects cash and reduces retained earnings, but the actual calculation uses net income and dividends, not the raw change in cash.

Ending retained earnings is carried forward from the beginning balance by adding net income for the period and subtracting dividends. The year’s change in cash is not part of that calculation; it appears on the balance sheet as a change in the cash asset and on the cash flow statement, not as a direct input to retained earnings. Net income increases retained earnings because it represents earnings that the company keeps, while dividends paid reduce retained earnings. If cash paid for dividends occurs, it affects cash and reduces retained earnings, but the actual calculation uses net income and dividends, not the raw change in cash.