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1. The retained earnings account is a link between the income statement and the balance sheet. ...

Question:

1. The retained earnings account is a link between the income statement and the balance sheet. Explain what this means.

2. What are the three types of cash flows reported in the statement of cash flows? Give an example of each type of activity for a company like Oakley, Inc., a designer, manufacturer, and distributor of high-performance eyewear, footwear, watches, and athletic equipment.

Retained Earnings:

Retained earnings is a term used in accounting. It refers to the accumulated earnings of a company over time and can be found on the balance sheet. Retained earnings can also be found on the statement of retained earnings, which is reported periodically in the annual report.

Answer and Explanation:

1) The retained earnings account is a link between the income statement and the balance sheet. This means that retained earnings are accumulated net income. In other words, at the end of each period net income is rolled from the net income statement to the balance sheet and added to retained earnings.

2) There are three different cash flow activities:

Cash flow from operations - An example for a company like Oakley includes a decrease in cash flow due to a cash purchase of inventory.

Cash flow from investing - An example for a company like Oakley includes an increase in cash due to the sale of equipment used to manufacture eyewear.

Cash flow from financing - An example for a company like Oakley includes a decrease in cash flow due to a dividend payment.


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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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