A.  Statement of Retained Earnings—Retained Earnings is total cumulative amount of reported net income less any net losses and dividends declared since the company’s inception. It is part of stockholders' equity (claim to the assets) and is not implying that any certain amount of cash or other assets actually exists.

1.   Restrictions and Appropriations

a.   Restricted retained earnings refers to both statutory and contractual restrictions.

b.   Appropriated retained earnings refers to a voluntary transfer of amounts from the Retained Earnings account.

2.   Prior Period Adjustments

a.   Corrections of material errors made in prior periods.

b.   Include arithmetic mistakes, unacceptable accounting, and missed facts.

c.   Reported in statement of retained earnings as corrections (net of income tax effects) to the beginning retained earnings balance.

d.   Changes in Accounting Estimates do not result in prior period adjustments, but are accounted for in current and future periods.

3.     Closing Process

a.        Close credit balances in revenue accounts to Income Summary

b.      Close debit balances in expense accounts to Income Summary.

c.       Close Income Summary to Retained Earnings

d.      Close Dividends account to Retained Earnings (if dividends were recorded in a Dividends account).

B.   Statement of Stockholders’ Equity

1.      Provided by most companies rather than a separate statement of retained earnings; the statement of stockholders’ equity includes changes in retained earnings.

2.   Lists the beginning and ending balances of each equity account and describes the changes that occurred during the period.

C. Reporting Stock Options

1.   Stock options are rights to purchase common stock at a fixed price over a specified period of time.  As stock prices rise above the fixed price, the option value increases.

2.   Stock options are said to motivate employees and managers..