Which statement accurately describes common stock, additional paid-in capital (APIC), and retained earnings?

• A. APIC represents amounts paid over par; retained earnings are cumulative profits minus dividends.
• B. Retained earnings are the company's cash reserves.
• C. Common stock represents par value shares issued; APIC represents amounts paid over par; retained earnings are cumulative profits minus dividends.
• D. Common stock represents market value shares issued.

Answer: (C)

Stockholders’ equity is built from three main components: common stock, additional paid-in capital (APIC), and retained earnings. Common stock reflects the par value of shares that have been issued. APIC captures the amount investors pay above that par value. Retained earnings represent the cumulative profits the company has earned that have not been distributed as dividends, i.e., profits minus dividends over time. This combination explains how equity is shown on the balance sheet: the par value portion under common stock, the excess over par in APIC, and the accumulated undistributed earnings in retained earnings. Retained earnings are not the same as cash reserves, and common stock is not recorded at market value—the accounting records par value for common stock and the excess as APIC. This makes the statement that correctly describes all three components the best choice.