What happens to retained earnings if errors in previously reported net income are corrected?

When errors in previously reported net income are corrected, such corrections directly impact retained earnings, which reflect the cumulative net income or loss of a company after dividends are paid out. If net income was overstated due to an error, this means that the retained earnings also reflected an inflated amount.

Correcting such an error involves adjusting the retained earnings to accurately reflect the actual net income. Therefore, if the correction reveals that net income was too high, retained earnings will decrease to adjust for the difference. This decrease is necessary to ensure that the financial statements accurately represent the financial position of the company and comply with the accurate accounting standards.

In the context of the other choices, retained earnings can fluctuate based on the nature of the errors—specifically, whether income was overstated or understated—but the key takeaway is that correcting overstatements in net income leads directly to a decrease in retained earnings, making this response accurate and aligned with accounting principles.