Accounting Certification Practice Test 2026 – Complete Online Preparation

A statement of retained earnings primarily shows changes in retained earnings over a specific period. This financial statement acts as a bridge between the income statement and the balance sheet, detailing how the company's retained earnings have evolved from one accounting period to another. It reflects various factors that influence retained earnings, including net income, dividends paid to shareholders, and any prior period adjustments.

For instance, if a company has a net income during the period, this amount is added to the retained earnings. Conversely, if dividends are declared and paid to shareholders, this amount is subtracted from the retained earnings. By summarizing these factors, the statement provides stakeholders with critical insights into how effectively the company is retaining its earnings for reinvestment, as opposed to distributing profits to shareholders.

This specific focus on retained earnings distinguishes it from the other options, as it does not deal with cash flows, overall company revenue, or the complete asset and liability landscape. Instead, it hones in on the accumulation of profits that a company retains for future growth and operational needs.