What must be considered to accurately assess the impact on retained earnings?

The impact on retained earnings is fundamentally influenced by net income and the dividends distributed to shareholders. Retained earnings represent the cumulative amount of a company's net income that has been retained, rather than paid out as dividends.

When a company generates net income, this amount is added to retained earnings. Conversely, when dividends are paid to shareholders, this amount is subtracted from retained earnings. Thus, to accurately assess the changes in retained earnings, one must consider both of these factors.

While income generated, cash flow timing, and operating expenses may have indirect effects on retained earnings, they do not directly determine the retained earnings balance. Income generated influences the net income, and while cash flow timing can affect when income is recognized, it doesn’t change the fact that retained earnings are altered by net income and dividends. Operating expenses primarily impact net income but do not factor directly into retained earnings apart from affecting overall profitability.

Hence, focusing on both dividends paid and net income provides a comprehensive view of how retained earnings are affected.