In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. The ending balance in the Retained Earnings account is:

Question

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To analyze the ending balance of Retained Earnings, start from the beginning balance and incorporate the period's net income or loss.

Option by option examination:

- Option "$60,000.": This would imply no change in Retained Earnings during the period. However, the company experienced a net loss of $10,000, which decreases Retained Earnings, so the ending balance cannot remain at $60,000. This choice ignores the period’s loss.

- Option "$35,000.": If this were the ending balance, it would suggest a total decrease of $25,000 from the beginning balance. The only information affecting Retained Earnings here is the net loss of $10,000; there is no data or mechanism in this problem that would justify an additional $15,000 decrease to reach $35,000. Therefore this is inconsistent with the given data.

- Option "$50,000." (Correct): Beginning balance $60,000 minus net loss $10,000 equals ending Retained Earnings of $50,000. The statement also mentions net cash outflows of $15,000, but cash flows do not directly reduce Retained Earnings in the stockholders’ equity equation, so they do not affect the ending Retained Earnings figure.

- Option "$45,000.": This would reflect a $15,000 decrease in Retained Earnings beyond the $10,000 loss. Since there is no basis in the problem for an extra $15,000 deduction from Retained Earnings (cash outflows are separate and do not reduce retained earnings directly), this choice misattributes the impact of cash flows to Retained Earnings.

In summary, the starting Retained Earnings decreased by the period’s net loss, and cash outflows do not alter Retained Earnings in this context. Therefore, the correct arithmetic is $60,000 − $10,000 = $50,000, which aligns with option $50,000.

25/SP-ACC-220-1M3, ACC-220-103 Chapter Three Quiz

In the statement of stockholders' equity, Retained Earnings had a beginning balance of $60,000. During the period, the company reports a net loss of $10,000 and net cash outflows of $15,000. The ending balance in the Retained Earnings account is:

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