What is the effect of holding gains and losses on financial statements?

Holding gains and losses refer to the unrealized gains or losses arising from changes in the fair value of assets or liabilities that have not yet been realized through a transaction. Their impact on financial statements is crucial for providing a true and fair view of a company's financial position.

The correct choice highlights that holding gains and losses can affect both retained earnings and other comprehensive income. This is significant because some holding gains and losses are recognized in other comprehensive income as part of a company's other comprehensive income statement, while others may impact profit or loss and therefore affect retained earnings directly.

For instance, if a company holds an investment in equity securities classified as "available for sale," the holding gains or losses would typically be recognized in other comprehensive income, affecting equity but not retained earnings directly until the gains or losses are realized. Conversely, if a company holds a trading security, any gains or losses would be recognized in profit or loss and would affect retained earnings accordingly.

This dual effect is essential for understanding the comprehensive impact of holding gains and losses on a company's financial statements, as these items provide critical insight into the company's financial health beyond what is captured in net income alone.