What will happen to retained earnings if net income decreases by $6?

• A. Retained earnings increase
• B. Retained earnings are unaffected
• C. Retained earnings decrease by $6
• D. Retained earnings decrease by $10

Answer: (C)

When net income decreases, it directly affects retained earnings because retained earnings are calculated as the cumulative net income of a company over time, minus any dividends paid out to shareholders. A reduction in net income means there are fewer profits available to be retained in the business after considering any distributions.

In this scenario, if net income decreases by $6, it implies that there is $6 less profit available to add to retained earnings. Therefore, retained earnings will also decrease by the same amount, specifically by $6. This aligns with the fundamental accounting equation that connects net income and retained earnings, reinforcing the idea that retained earnings will move in tandem with net income fluctuations.