Question

During the year, Bambi Inc made a loss of $5,000. Which of the following must be true?

a. If Bambi's Retained earnings decrease, then Bambi must have paid dividends

b. If Bambi's Retained earnings increase, then Bambi must have paid dividends

c. If Bambi's total Stockholder's Equity increases, then shareholders must have contributed additional capital

d. If Bambi's total Stockholder's Equity decreases, then shareholders must have contributed additional capital

e. None of the statements above is necessarily true

Answer 1

The net income increases retained earnings and net loss decreases retained earnings.

The dividends paid reduce retained earnings.

The increase in retained Earnings eventually increases total stockholder's equity and decrease in retained earnings decrease total stockholder's equity.

The additional contribution of capital increases total stockholder's equity.

Option a) is incorrect because the retained earnings would decrease even if no dividends are paid because the loss of $5,000 would decrease retained earnings.

Option b) is incorrect because dividends decrease retained Earnings.

Option d) is incorrect because the contribution of additional Capital would increase total stockholder's equity.

option c) is correct because in the given case the company has earned net loss. So the only thing that can increase the total stockholder's equity is additional capital. Now if the total stockholder's equity has increased, then the shareholders must have contributed additional capital.

​​​​​​Hence, the correct answer is c.  If Bambi's total Stockholder's Equity increases, then shareholders must have contributed additional capital