How does Net Income flow into the balance sheet in a standard integrated model?

• A. Net Income increases equity through retained earnings and may increase cash via CFO, or decrease cash if dividends are paid.
• B. Net Income increases cash automatically.
• C. Net Income has no impact on the balance sheet.
• D. Net Income only affects revenue.

Answer: (A)

Net income shows up on the balance sheet through retained earnings, which are part of shareholders’ equity. In an integrated model, the amount of net income adds to retained earnings, increasing equity. On the cash side, net income feeds the cash flow statement as the starting point for cash flow from operating activities, and after accounting for non-cash items and changes in working capital, the result is the actual cash generated from operations. If dividends are paid, cash decreases and retained earnings are reduced by the dividend amount, since dividends are a distribution of earnings. So net income boosts equity via retained earnings and can raise cash through operating cash flow, or reduce cash if dividends are paid.