 Hello and welcome to the session in which you would look at retained earnings retained earnings is an important number on the financial statements specifically on the balance sheet retained earnings is that account that absorbs revenues expenses dividend revenues and expenses which is which is net income dividend as well as other transactions. So it's very important whether you are a CPA candidate or an accounting students to have a good understanding of the account retained earnings. I do believe this multiple choice question is a good illustration of what you need to know about retained earnings. It's going to include various transaction that affects this account. Now whether you are a CPA candidate or an accounting student I strongly suggest you take a look at my website. foreheadlectures.com especially if you are a CPA candidate. I don't replace your CPA review course. Most likely you are taking a course. I'm a useful edition. Admit your CPA review course. 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Please connect with me on Instagram Facebook Twitter and Reddit. So let's take a look at this question that illustrates the concept of retained earnings an important account on the balance sheet. At the beginning of 2022 Adam company had retained earnings of 100,000. So immediately in your mind you should be thinking I am I have a credit of 100,000 and retained earnings. Or if you don't want to use the debit send the credits you will start with the beginning balance of 100,000 I'm going to do it both ways. Because some students are comfortable with debits and credits some students are not they are more comfortable with addition and subtraction I will do it both ways. During the year Adam company reported net income of 50,000 net income it means your retained earnings will increase by 50,000 your retained earnings will increase by 50,000 and this has to do with net income you need to understand that net income net income absorbs. Which color? I want you to do blue. Okay, blue. We're switching to blue. Okay. Adam company reported net income of 50,000 we talked about this sold treasury stock at a gain of 18,000. Now we sold the treasury stock at a gain. What do we need to do with this gain? Well, you have to be familiar with treasury stock. You have to understand that if you buy or sell your own stock and you generate your own stock. If you generate a gain you cannot report the gain in retained earnings. Well, you might have to report the losses that there are certain rules for this. I said you might because if you have gains and you have losses you can offset the losses against the prior gains which is will be paid in capital treasury stock Have an again, remember have an again from your treasury stock will not affect retained earnings. Therefore, kind of treasury stock gain it's given there to confuse you it doesn't affect retained earnings. Losses might and I said might because sometimes it does affect retained earnings sometimes it does not. So if it does it's going to reduce retained earnings. If you have losses from treasury stock but we don't have losses here. You declare cash dividend of 30,000. Well, you need to understand that cash dividend will reduce retained earnings by 30,000. So this is the cash dividend. So this is the dividend. So this is basically mainly what affect retained earnings net income increase it dividend to reduce it. Okay. And if that's all what you have now you can compute it ending retained earnings. And the company declared an issue small stock dividends. I'm going to use here a highlighter to kind of now we're moving into another territory. I need to go back and put everything down. So we have retained earning of 100,000. We have net income of 50 and dividend of 30. This is what we started with 100,000 plus 50 minus 30. And I came I came here and I by mistake I erased everything I was going to do the highlighter and I'm going to highlight declare a small stock dividend of 1500 shares when the market value was $20 per share the power value is $1. Now here you have to understand so this this question really involved a few things it involved net income it involved dividend cash dividend it involved treasury stock and it involved stock dividend. So this this exercise really that's why I said it's a good exercise to cover retained earnings because it's going to affect retained earning in so many ways. Now when the company declare stock dividend stock dividend any dividend would reduce retained earnings. But the question is, is this a large stock dividend or a small stock dividend what it says here, it's a small stock dividend. Well, if it's a small stock dividend, how much do you debit retained earnings? How much do you reduce retained earning? If it's a small stock dividend, you're going to take the number of shares, which is 1500 times and you have to be very careful here times the fair market value, which is $20. Well, if I take 1500 times $20, that's going to give me 30,000. Well, you need to know how you need to know how stock dividend work. You will debit retained earning common stock dividend distributable, but you know we're not talking about stock dividend. You can go to my intermediate accounting course if you're interested in that, but you need to know that we have stock dividend of $30,000 less. Okay, so now after remember you're giving the power value to confuse you if this was a large stock dividend, then you will take 1500 times. 10 and you would have debited retained earning only 15, but this is not a large stock dividend. This is a small stock dividend. If it's a small stock dividend, you will take the number of shares times the market value. Now we are ready to compute ending retained earnings because nothing else. What's the ending retained earnings? We started with 100 net income 50, that's 150. Then we reduced it by the cash dividend of 30. Then we reduced it by the small stock dividend of 30. Overall, our ending retained earning is 90,000. So the answer is the net income is 90,000. Okay, that's the answer. Now this is a multiple choice question. I can give you the same exercise. However, I can give you different exhibits or maybe I can tell you this is the balance sheet and I can tell you here's the minutes for the board of directors where they declare the dividend, the cash dividend, where they declare the small stock dividend. So the point is this can be a multiple choice. I can take this multiple choice and give you four different exhibits. I can give you the income statement. I can give you the balance sheet, which is gives you beginning retained earning. And I can give you the meetings for the board of directors where they declared the dividend. Then I can give you an exhibit from a newspaper giving you what is the stock price of the company at that date and make it into a simulation and an intimidated simulation. The point is it doesn't matter whether this is a multiple choice question or a simulation, you should be ready to answer both on the CPA exam. And this is what I can offer you. I can offer you additional resources, additional explanation differently for the backup explanation to your CPA review course. And that's why you should give me a chance. Give me a chance to help you. I'm a useful addition to your CPA review course. Your risk is one month of subscription. Your potential gain is passing the exam. Passing the exam is worth it. It's a long term investment in your career. Good luck. Study hard. And of course, stay safe.