What is Statement Of Retained Earnings?

642 reads · Last updated: December 5, 2024

The statement of retained earnings (retained earnings statement) is a financial statement that outlines the changes in retained earnings for a company over a specified period. This statement reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements, and is used by analysts to understand how corporate profits are utilized.The statement of retained earnings is also known as a statement of owner's equity, an equity statement, or a statement of shareholders' equity. Boilerplate templates of the statement of retained earnings can be found online. It is prepared in accordance with generally accepted accounting principles (GAAP).

Definition

The retained earnings statement is a financial report that describes the changes in a company's retained earnings over a specified period. This statement adjusts the beginning and ending retained earnings for the period using net income and other information from financial statements, and is used by analysts to understand how a company utilizes its profits.

Origin

The origin of the retained earnings statement can be traced back to the development of modern accounting systems. As businesses grew in size and financial management became more complex, there was a need for a method to record and report changes in retained earnings. Thus, the retained earnings statement became part of financial reporting, helping companies and investors better understand a company's financial health.

Categories and Features

The retained earnings statement typically includes beginning retained earnings, net income, dividend payments, and ending retained earnings. Its features include clearly showing how a company reinvests its profits or distributes them to shareholders. The advantage of the retained earnings statement is that it provides transparency about the internal flow of funds within a company, but its disadvantage is that it may not fully reflect the overall financial condition of the company.

Case Studies

Case Study 1: Apple Inc. details changes in retained earnings in its annual financial reports, showing how it reinvests profits to drive innovation and growth. Case Study 2: Coca-Cola Company uses its retained earnings statement to demonstrate how it utilizes funds for global market expansion, helping investors understand its long-term strategy.

Common Issues

Investors often confuse the retained earnings statement with the cash flow statement. The retained earnings statement focuses on the allocation and reinvestment of profits, while the cash flow statement focuses on the actual flow of cash. Additionally, an increase in retained earnings does not always indicate an improvement in financial health, as it may result from reduced dividend payments rather than profit growth.

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