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Ending retained earnings is calculated as:
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12. Stockholders' Equity
Retained Earnings
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What effect does revenue have on retained earnings?
A
Revenue only affects assets, not retained earnings.
B
Revenue increases retained earnings by increasing net income.
C
Revenue decreases retained earnings by increasing expenses.
D
Revenue has no effect on retained earnings.
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Understand the relationship between revenue and retained earnings: Revenue is a component of net income, and net income directly impacts retained earnings.
Recall the formula for retained earnings: Retained Earnings = Beginning Retained Earnings + Net Income - Dividends.
Recognize that revenue contributes to net income, which is calculated as: Net Income = Revenue - Expenses.
When revenue increases, assuming expenses remain constant, net income increases. This increase in net income leads to an increase in retained earnings.
Conclude that revenue has a positive effect on retained earnings by increasing net income, which is added to retained earnings after accounting for dividends.
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