SAP Financial Accounting (SAP FI) Practice Exam

What type of financial statement would you expect to include the retained earnings account?

1. Balance sheet

2. Cash flow statement

3. Profit and loss statement

4. Statement of changes in equity

The correct answer is: Statement of changes in equity

The retained earnings account is specifically associated with the statement of changes in equity. This statement outlines the movements in equity accounts over a specific period, and it includes the retained earnings figure, which represents the cumulative amount of net income that a company has retained, rather than distributed as dividends to shareholders. Within the statement of changes in equity, you can see how retained earnings are affected by various factors, such as net income or loss during a reporting period and dividends paid out. This gives stakeholders a clearer view of how profits are being managed and reinvested in the business. While the balance sheet also shows retained earnings as part of the shareholders’ equity section, it does not provide the details of changes in retained earnings over the period. The cash flow statement focuses on the cash inflows and outflows during a period and does not include retained earnings. The profit and loss statement reports on the company's revenues and expenses, ultimately leading to net income, which contributes to retained earnings but does not display the accumulated retained earnings directly. Thus, the statement of changes in equity is the most definitive source for understanding the retained earnings account and its movements over a given period.