Question

multiple choice

retained earnings of $100,000 represent a corporations cumulative earnings ____ and is shown on the ____.

• declared; statement of retained earnings
• kept; balance sheet and statement of retained earnings
• in cash; balance sheet

Explanation:

Analyze the definition of retained earnings

Retained earnings represent the cumulative net income (earnings) of a corporation that have been kept (retained) in the business rather than distributed to shareholders as dividends. Therefore, the first blank is filled by "kept".

Identify the financial statements where retained earnings are shown

Retained earnings are reported on the balance sheet under the stockholders' equity section. Additionally, the details of the changes in retained earnings over a period are presented in the statement of retained earnings (or statement of stockholders' equity). Therefore, retained earnings are shown on both the balance sheet and the statement of retained earnings.

Match with the given options

• Option 1: "declared; statement of retained earnings" (Incorrect: earnings are kept, not declared, and they also appear on the balance sheet).
• Option 2: "kept; balance sheet and statement of retained earnings" (Correct: matches both the definition of being kept and the presentation on both statements).
• Option 3: "in cash; balance sheet" (Incorrect: retained earnings do not represent cash; they represent accumulated earnings reinvested).

Answer:

• declared; statement of retained earnings
• kept; balance sheet and statement of retained earnings (Correct answer)
• in cash; balance sheet