What Is the Statement of Retained earnings?
The statement of retained earnings is the shortest of the financial statements. It allows you to see which profits have been distributed as dividends during the year.
During each year, the company must choose whether or not to pay dividends to shareholders.
Generally, a dividend policy is in place. Once this has been determined, you can know what proportions will be paid out by type of action.
The growing business needs liquidity to support the rapid increase in revenue. Thus, it will have to define its dividend policy with particular attention so as not to run out of money.
It is therefore not surprising to see some statements of retained earnings having no dividend payments.
What Is the Statement of Retained Earnings Equation?
The statement of retained earnings equation is used to calculate the cumulative balance at the end of a financial year. It is calculated by taking the beginning retained earnings, adding net income for the period, and subtracting dividends paid out to shareholders.
Retained Earnings = Beginning Retained Earnings + Net Income − Dividends Paid Out
Once this equation is used to calculate the balance at the end of a financial year, it can be carried over as the beginning retained earnings for the following period.
By taking into account both net income and dividends paid out to shareholders, you have an accurate picture of how much money is being kept within the company.
What Are Retained Earnings on the Balance Sheet?
Retained earnings are a component of shareholders’ equity on the balance sheet. They represent the portion of profits not paid out as dividends but instead kept within the company.
This money is then used to finance various activities and investments. This can include acquisitions, research and development expenses, or reinvesting in the business itself.
The balance sheet item named retained earnings is in fact the same amount as that found in the statement of retained earnings. It simply reflects the cumulative total of profits retained by the company since its inception.
This number is crucial in gaining an understanding of how much money has been kept within the company and what it is being used for. Knowing this information allows investors to make more informed decisions when evaluating a company.
What Are the Other Financial Statements of a Company?
In addition to the statement of retained earnings, other important financial statements of a company include the balance sheet, income statement, and cash flow statement.
The balance sheet displays a company’s assets and liabilities, as well as its shareholders’ equity.
The income statement shows the revenues and expenses for a specified period of time.
Finally, the cash flow statement reveals a company’s inflow and outflow of funds, thus showing its ability to generate positive cash flow. By looking at these other financial statements together, you can gain an accurate picture of a company’s financial health.
By understanding the components of each financial statement and how they relate to each other, you can make educated decisions when investing in a company.