Chapter 1, Problem 1.5E

(a)

To determine

Retained earnings statement:

This is a financial statement that shows the amount of the net income retained by a company at a particular point of time for reinvestment and pays its debts and obligations. It shows the amount of retained earnings that is not paid as dividends to the shareholders.

To prepare: An income statement and a retained earnings statement for the year ending December 31, 2017.

(b)

To determine

Income statement

This is a financial statement that shows the net income earned or net loss suffered by a company through reporting all the revenues earned and expenses incurred by the company over a specific period of time. Income statement is also known as operations statement, earnings statement, revenue statement, or profit and loss statement. The net income is the excess of revenue over expenses.

To find out: theshort-term implications, long-term implications, and the stock market reaction if Company M decided to reduce the research and development expense by 50%.