Which statement best describes the equation used to compute ending retained earnings?

• A. Ending retained earnings equals beginning retained earnings plus net income minus dividends
• B. Ending retained earnings equals beginning retained earnings plus capital expenditures minus dividends
• C. Ending retained earnings equals net income minus taxes
• D. Ending retained earnings equals beginning retained earnings plus accounting changes

Answer: (A)

Retained earnings reflect the cumulative profits kept in the business after dividends. To arrive at the ending balance, start with the beginning retained earnings, add the period’s net income (which increases the amount kept in the business), and subtract the dividends paid to shareholders (which reduces the amount kept). Net income is already after tax, so taxes aren’t subtracted again in this equation. This simple flow—beginning balance plus net income minus dividends—captures how profits are retained over time. For a quick check, if beginning retained earnings are 100, net income is 50, and dividends are 20, ending retained earnings would be 130. Capital expenditures affect cash and asset accounts, not the retained earnings balance directly, and accounting changes would affect retained earnings only in specific restatement contexts, not in the standard ongoing calculation.