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Which of the following actions would affect retained earnings?

1. The company sold additional stock.
2. The company paid dividends to its shareholders.
3. The company purchased a new automobile.
4. The company manufactured a new product.

Answer :

Payment of dividends is the action that directly affects a company's retained earnings, as it reduces the balance of retained earnings on the balance sheet. Hence, the correct option is 2) The company paid dividends to its shareholders..

Out of the actions listed, only one directly affects a company's retained earnings: when the company pays dividends to its shareholders. Retained earnings represent the cumulative amount of net income that a company has decided to keep and reinvest in the business rather than distribute to shareholders as dividends.

Therefore, when a company distributes dividends, it decreases the retained earnings balance on the balance sheet. Selling additional stock, purchasing new assets like an automobile, or manufacturing new products are actions related to financing and operating activities, respectively, and do not directly impact retained earnings in the immediate sense.

One action that affects a company's retained earnings is when the company pays out dividends to its shareholders, thus reducing the retained earnings balance. Hence, the correct option is 2) The company paid dividends to its shareholders..

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