Accounting Online Program Certification Practice Test 2025 - Free Certification Practice Questions and Study Guide

The statement of retained earnings specifically focuses on changes in a company's retained earnings over a specific period. This financial statement outlines the beginning balance of retained earnings, adds the net income earned during the period, and subtracts any dividends paid out to shareholders.

This statement is vital for understanding how profits are retained within the company for reinvestment, rather than being distributed as dividends. It connects the income statement and the balance sheet, showing how current performance influences the equity section of the balance sheet by adjusting retained earnings.

While the income statement provides details on revenue and expenses, and consequently, the net income that impacts retained earnings, it does not directly display the retained earnings figure itself. The balance sheet includes retained earnings as part of the equity section but does not provide a breakdown of the changes that occurred over the period. The cash flow statement focuses on the cash inflows and outflows without addressing retained earnings. Hence, the statement of retained earnings is the most direct source for examining that specific aspect of a company's financials.