MCQs on Retained Earnings

Retained earnings are referred to as that part of earnings or profit that is not distributed to the shareholders as dividends. These profits are reinvested in the business towards working capital requirements and for purchasing of fixed assets. It can also be used for paying off any kind of debt obligations.

Following are some of the retained earnings multiple choice questions and answers that will help the students in brushing up their understanding of the concept of retained earnings.

Q.1 Retained earnings are:

(a) Not important at the time of determining dividends.

(b) Also known as cumulative earnings of the company after paying the dividends.

(c) Indication of a company’s liquidity position.

(d) Similar to cash in a bank.

Answer: b

Q.2 In a balance sheet, the sum of retained earnings and common stock are known as:

(a) Common perpetuity

(b) Common equity

(c) Due equity

(d) Preferred equity

Answer: b

Q.3 Which of the following is true?

(a) Retained Earnings are cheaper than External Equity

(b) Retained Earnings are costlier than External Equity

(c) Equity Retained earnings are cost free

(d) External Equity is cheaper than Internal Equity

Answer: a

Q.4 This is considered as the most expensive source of funds

(a) Retained Earnings

(b) New Debts

(c) New Preference Shares

(d) New Equity Shares

Answer: d

Q.5 The dividend-payout ratio is equal to

(a) Dividends per share divided by current price per share.

(b) Dividends per share divided by par value per share.

(c) Dividends per share divided by earnings per share.

(d) The dividend yield plus the capital gains yield.

Answer: c

Q.6 For a company making profits, which of the following statements is likely to be true?

a) Retained earnings at the year end will be greater than retained profits at the beginning of the year.

b) Retained earnings at the year end will be greater than shareholders’ equity.

c) The profit for the year will be greater than the gross profit.

d) The operating profit will be less than the profit for the year.

Answer: a

Q.7 A financial document indicating the success or failure of a business trading over a time period is known as?

(a) Retained earnings statement

(b) Income statement

(c) Bank statement

(d) Cash flow statement

Answer: b

Q.8 Decrease in retained earnings can be explained by which of the following factors?

(a) Investments by stockholders

(b) Dividends

(c) Net loss

(d) Net income

Answer: c

Q.9 The Retained Earnings account comprises:

(a) The earnings of the corporation for the current year.

(b) Cash reinvested in the business by shareholders.

(c) The cumulative earnings less dividends since the inception of the corporation.

(d) Cash retained in the business.

Answer: c

Q.10 Among the following options which one is false with regard to appropriations of retained earnings?

(a) They require setting aside a reserve of cash for the appropriations.

(b) They may be made at the discretion of the board of directors.

(c) They will restrict the amount of possible cash dividends.

(d) They may be required because of contractual obligations.

Answer: a

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