On which two financial statements does the Retained Earnings account appear?

• A. Statement of Stockholders' Equity and Statement of Cash Flows
• B. Statement of Cash Flows and Income Statement
• C. Income Statement and Balance Sheet
• D. Balance Sheet and Statement of Stockholders' Equity

Answer: (D)

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 an important component of equity.
2. Identify the financial statements where Retained Earnings are reported: Retained Earnings appear on the Balance Sheet as part of Stockholders' Equity and on the Statement of Stockholders' Equity, which details changes in equity accounts over a period.
3. Clarify why Retained Earnings do not appear on the Income Statement: The Income Statement reports revenues, expenses, and net income for a specific period, but it does not include Retained Earnings directly. Retained Earnings are derived from net income but are reported separately.
4. Explain why Retained Earnings do not appear on the Statement of Cash Flows: The Statement of Cash Flows focuses on cash inflows and outflows from operating, investing, and financing activities. While dividends (which reduce Retained Earnings) may be shown, the Retained Earnings account itself is not reported here.
5. Conclude that the correct answer is Balance Sheet and Statement of Stockholders' Equity, as these are the two financial statements where Retained Earnings are explicitly presented.