Q. The cumulative amount of earnings recognized on a company’s income statements that have not been distributed as dividends to the company’s owners is best described as:
A. retained earnings.
B. accumulated other comprehensive income.
C. dividends payable.
A is correct. Retained earnings, a component of equity, is defined as the cumulative amount of earnings recognized on the company’s income statements that have not been distributed as dividends to the company’s owners.
B is incorrect because other comprehensive income is also a component of equity, but it is defined as items of comprehensive income not reported on the income statement.
C is incorrect because dividends payable represent dividends that have been declared but not yet paid. Not all earnings not yet paid out would be accrued as a liability: only those that have been declared as dividends.
What I don’t understand is that I though retained earnings is reported in the balance sheet. Income statement only records Net Income. How is A the correct answer？