Question

2 On its 2012 balance sheet, Barngrover Books showed $510 million of retained earnings, and
exactly that same amount was shown the following year in 2013. Assuming that no earnings
restatements were issued, which of the following statements is CORRECT? Why?

a. Dividends could have been paid in 2013, but they would have had to equal the earnings
for the year.
b. If the company lost money in 2013, they must have paid dividends.
c. The company must have had zero net income in 2013.
d. The company must have paid out half of its earnings as dividends.
e. The company must have paid no dividends in 2013.

Answer 1

a. Dividends could have been paid in 2013, but they would have had to equal the earnings for the year is the only correct statement.

In accounting, retained earnings refers to the portion of net income of a corporation that is retained by the corporation rather than distributed to shareholders as dividends, or as the amount available to the corporation for distribution to shareholders. Similarly, if the corporation incurs a loss, then that loss reduces the corporation's retained earnings balance. If the balance of the retained earnings account is negative it may be called retained losses, accumulated losses or accumulated deficit, or similar terminology. Retained earnings and losses are cumulative from year to year.

That's why the dividends paid in 2013 would have had to equal the earnings for the year.