2. Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A) Paid-in capital
B) Common stock
C) Retained earnings
D) Accumulated depreciation
The correct answer is C) Retained earnings.
Retained earnings represent the cumulative earnings of a firm since its formation, minus any dividends that have been paid out to shareholders. This account is found on the balance sheet and is a part of the shareholders' equity section.
To determine the correct answer to this question, you can start by understanding what each of the given options represents:
A) Paid-in capital refers to the capital that shareholders have contributed to the company by purchasing shares of stock.
B) Common stock is a type of equity that represents ownership in the company and is typically issued to shareholders.
C) Retained earnings, as mentioned earlier, represent the accumulated earnings of the company that have been retained and reinvested in the business, rather than being distributed to shareholders as dividends.
D) Accumulated depreciation, on the other hand, is not related to the earnings of the company. It is a contra-asset account that represents the total depreciation expense recognized over the life of an asset.
Given the question's description of cumulative earnings since the firm's formation, minus dividends paid, the most appropriate option is C) Retained earnings.