Retained earnings are a category of which of the following on the balance sheet?

• A. Current assets
• B. Long-term investments
• C. Stockholders' equity
• D. Current liabilities

Answer: (C)

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 part of the equity section of the balance sheet.
2. Review the structure of the balance sheet: The balance sheet is divided into three main sections: assets, liabilities, and stockholders' equity. Retained earnings are not classified as assets or liabilities.
3. Identify the correct category: Retained earnings are part of stockholders' equity because they represent the portion of profits that belong to shareholders but are reinvested in the business rather than paid out as dividends.
4. Eliminate incorrect options: Retained earnings are not current assets, long-term investments, or current liabilities. These categories represent different aspects of the balance sheet, such as resources owned by the company or obligations owed.
5. Confirm the correct classification: Retained earnings are listed under stockholders' equity on the balance sheet, alongside other equity accounts like common stock and additional paid-in capital.