Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders?

Question

BlackTom AI · Accepted Answer

To tackle this question, we consider what each financial statement shows and how profits are distributed to shareholders.
Option 1: Statement of Retained Earnings. This statement tracks the changes in retained earnings over a period, starting from beginning retained earnings, adding net income, and subtracting dividends paid to shareholders. Since dividends are distributions of profits to owners, this statement directly reflects whether profits were distributed to shareholders. The presence and amount of dividends would indicate distribution of profits.
Option 2: Balance Sheet. The balance sheet lists assets, liabilities, and equity at a point in time. While it shows the overall equity balance, it does not specifically reveal whether profits were distributed as dividends during the period, because the change in retained earnings is memorialized over the period in another statement, and the balance sheet alone doesn’t separate income and distributions.
Option 3: Income Statement. The income statement reports revenues and expenses to derive net income for the period. It shows the profitability of operations but does not indicate how profits were allocated, such as whether any net income was distributed as dividends to shareholders. Therefore it does not directly answer whether profits were distributed.
By comparing how each statement handles profit flows, the Statement of Retained Earnings uniquely captures the effect of distributing profits via dividends, separating those distributions from other movements in equity. The other two statements provide essential context about financial position and operating performance but do not explicitly reveal distributions to shareholders.

Introduction to Financial Accounting M1: Quiz

Which financial statement would you analyze to determine if a company distributed any of its profits to its shareholders?

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