Retained earnings is decreased by which of the following?

• A. Net losses
• B. Revenue earned
• C. Purchase of equipment
• D. Issuance of common stock

Answer: (A)

Verified step by step guidance

1. Understand the concept of retained earnings: Retained earnings represent the cumulative amount of net income that a company has retained, rather than distributed as dividends to shareholders. It is affected by net income, net losses, and dividend payments.
2. Analyze the impact of net losses: Net losses decrease retained earnings because they reduce the overall profitability of the company. This is directly reflected in the retained earnings account.
3. Evaluate the impact of revenue earned: Revenue earned increases net income, which in turn increases retained earnings. Therefore, revenue earned does not decrease retained earnings.
4. Consider the purchase of equipment: The purchase of equipment is recorded as an asset and does not directly affect retained earnings. It impacts the balance sheet but does not decrease retained earnings.
5. Assess the issuance of common stock: Issuance of common stock affects the equity section of the balance sheet but does not impact retained earnings directly. It increases paid-in capital rather than decreasing retained earnings.