What Is A Statement Of Retained Earnings?
Retained earnings is the amount of profit a company invests in itself (i.e., profit that is not used to pay back debt or distributed to shareholders as a dividend).
The Statement of Retained Earnings is a reconciliation of the Retained Earnings account from the beginning to the end of the year.
When a company announces income or declares dividends, this information is reflected in the Statement of Retained Earnings. Net income increases the Retained Earnings account. Net losses and dividend payments decrease Retained Earnings.
Here is an example of a basic Statement of Retained Earnings:
As you can probably tell by looking at this example, the Statement of Retained Earnings doesn’t provide any new information not already reflected in other financial statements. But it does provide additional information about what management is doing with the company’s earnings.
Management may be reinvesting the company’s net income into the business by retaining part or all of its earnings, distributing its current income to shareholders, or distributing current and accumulated income to shareholders. (Investors can use this information to align their investment strategy with the strategy of a company’s management.
An investor interested in growth and returns on capital may be more inclined to invest in a company that reinvests its resources into the company for the purpose of generating additional resources. Conversely, an investor interested in receiving current income is more inclined to invest in a company that pays quarterly dividend distributions to shareholders.)
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