Statement of Retained Earnings

Definition

The statement of retained earnings is a financial statement that reports the changes in a company's retained earnings account over a specified period of time. Retained earnings represent the portion of a company's net income that is retained or saved for future use, rather than being distributed to shareholders as dividends.

5 Must Know Facts For Your Next Test

1. The statement of retained earnings is one of the four primary financial statements, along with the balance sheet, income statement, and statement of cash flows.
2. The statement of retained earnings reconciles the beginning and ending retained earnings balances, showing the changes that occurred during the period.
3. The statement of retained earnings reports the net income or net loss for the period, as well as any dividends paid to shareholders.
4. The statement of retained earnings helps investors and analysts understand how a company is using its profits, whether it is reinvesting in the business or distributing earnings to shareholders.
5. The statement of retained earnings is important in analyzing a company's financial health and its ability to generate and retain earnings over time.

Review Questions

• Explain the purpose of the statement of retained earnings and how it relates to the balance sheet and income statement.
  • The statement of retained earnings serves as a bridge between the income statement and the balance sheet. It reports the changes in a company's retained earnings account, which represents the portion of net income that has been retained and reinvested in the business rather than distributed to shareholders as dividends. By understanding the changes in retained earnings, investors and analysts can gain insights into a company's financial performance, its ability to generate and retain profits, and how it is allocating its resources between reinvestment and dividend payments.
• Describe the key components and information provided in the statement of retained earnings.
  • The statement of retained earnings typically includes the following key components: 1) Beginning retained earnings balance, 2) Net income or net loss for the period, 3) Dividends declared and paid, and 4) Ending retained earnings balance. This statement reconciles the changes in the retained earnings account, showing how the company's net income has been allocated between reinvestment in the business and distributions to shareholders. By analyzing these components, users can assess the company's financial health, its profitability, and its dividend policy.
• Analyze how the statement of retained earnings can be used to evaluate a company's financial performance and decision-making.
  • The statement of retained earnings provides valuable insights into a company's financial performance and decision-making processes. By examining the changes in retained earnings, analysts can assess the company's ability to generate and retain profits, as well as its approach to capital allocation. A growing retained earnings balance may indicate that the company is reinvesting its profits back into the business for future growth, while a declining balance could suggest that the company is prioritizing dividend payments or facing challenges in maintaining profitability. Additionally, the statement of retained earnings can reveal information about the company's dividend policy and its willingness to distribute earnings to shareholders, which is an important consideration for investors.

Related terms

Retained Earnings: Retained earnings are the portion of a company's net income that is retained or saved for future use, rather than being distributed to shareholders as dividends.

Net Income: Net income is the total revenue a company generates minus its total expenses, representing the company's profit for a given period.

Dividends: Dividends are the distribution of a portion of a company's earnings to its shareholders, typically in the form of cash payments.