What will happen to retained earnings if net income decreases by $6?

What will happen to retained earnings if net income decreases by $6?

• A. Retained earnings increase
• B. Retained earnings are unaffected
• C. Retained earnings decrease by $6
• D. Retained earnings decrease by $10

Answer: (C)

When net income decreases, it directly affects retained earnings because retained earnings are calculated as the cumulative net income of a company over time, minus any dividends paid out to shareholders. A reduction in net income means there are fewer profits available to be retained in the business after considering any distributions. In this scenario, if net income decreases by $6, it implies that there is $6 less profit available to add to retained earnings. Therefore, retained earnings will also decrease by the same amount, specifically by $6. This aligns with the fundamental accounting equation that connects net income and retained earnings, reinforcing the idea that retained earnings will move in tandem with net income fluctuations.

When net income decreases, it directly affects retained earnings because retained earnings are calculated as the cumulative net income of a company over time, minus any dividends paid out to shareholders. A reduction in net income means there are fewer profits available to be retained in the business after considering any distributions.

In this scenario, if net income decreases by $6, it implies that there is $6 less profit available to add to retained earnings. Therefore, retained earnings will also decrease by the same amount, specifically by $6. This aligns with the fundamental accounting equation that connects net income and retained earnings, reinforcing the idea that retained earnings will move in tandem with net income fluctuations.