A security analyst obtained the following information from Prestopino Products\'
ID: 2612827 • Letter: A
Question
A security analyst obtained the following information from Prestopino Products' financial statements:
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On the basis of this information, what could have caused the reduction in retained earnings?
Prestopino had losses in the years before 2011.
Prestopino's paid dividends despite zero net income.
Prestopino reduced its net fixed assets in 2012 compared to 2011.
Prestopino's borrowed more money in 2012.
Prestopino's converted some of its retained earnings into cash.
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Retained earnings on its balance sheet at the end of 2011 were $700,000, but retained earnings at the end of 2012 had declined to $320,000.·
The company did not buy any shares back.·
The company's depreciation expense is its only non-cash expense; it has no amortization charges.·
The company has no non-cash revenues.·
The company's net income for 2012 was exactly zero dollars.Explanation / Answer
Answer :option (B) Prestopino's paid dividend despite of zero net income
option a is not correct because the losses before 2011 would have affected balance on 2011 as well but we are trying to ascertain reduction in retained earning due to a transaction in 2012 that reduced the amount from 2011.
Option c wrong because if the fixed assets would have been reduced it would have affected net income as well but as net income is zero and not negative (i.e.losses ) this would not impact retained earnings
Option d is irrelevat because borrowing would not affect balance of retained earnings.
option e is wrong because retained earning would already have an asset or cash against its balance thus equalling both sides of balance sheets.
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