retained earnings

Examples of retained earnings in the following topics:

• Introduction to the Retained Earning Statement

  • The statement of retained earnings explains the changes in a company's retained earnings over the reporting period.
  • The retained earnings statement explains the changes in a company's retained earnings over the reporting period.
  • Line items for the retained earnings statement typically include profits or losses from operations, dividends paid, issue or redemption of stock, and any other items charged or credited to retained earnings. .
  • The retained earnings statement may appear in the balance sheet, in a combined income statement and changes in retained earnings statement, or as a separate schedule.
  • Ending Retained Earnings = Beginning Retained Earnings − Dividends Paid + Net Income.

• Special Reporting

  • Other special reporting issues include Earnings per Share, Retained Earnings and Intraperiod Tax Allocation.
  • Retained Earnings: The statement of retained earnings explains the changes in a company's retained earnings over the reporting period.
  • It may appear in the balance sheet, in a combined income and changes in retained earnings statement, or as a separate schedule.
  • In essence, the statement of retained earnings uses information from the income statement and provides information to the balance sheet.
  • Summarize how a company reports extraordinary items, discontinued operations, intraperiod tax allocations, retained earnings and earnings per share.

• Closing the Cycle

  • Only revenue, expense, and dividend accounts are closed—not asset, liability, Capital Stock, or Retained Earnings accounts.
  • Closing the Income Summary account—transferring the balance of the Income Summary account to the Retained Earnings account (also known as the capital account).
  • Closing the Dividends account—transferring the balance of the Dividends account to the Retained Earnings Account
  • Closing or transferring the balance in the Income Summary account to the Retained Earnings account results in a zero balance in the Income Summary.
  • The dividends account is closed directly to the Retained Earnings account.

• Overview of Statement Changes and Errors

  • Make an offsetting adjustment to the opening balance of retained earnings for that period; and
  • If the financial statements are only presented for a single period, then reflect the adjustment in the opening balance of retained earnings.
  • Yet when retained earning for year Z is correct, because the two previous errors cancelled each other out.
  • If the error has not counterbalanced then an entry must be made to retained earnings.
  • If the error has not counterbalanced, an entry is necessary to adjusted beginning retained earnings and correct the current period.

• The Post-Closing Trial Balance

  • The purpose of closing entries is to transfer the balances of the temporary accounts (expenses, revenues, gains, etc.) to the retained earnings account.
  • However, all the other accounts having non-negative balances are listed, including the retained earnings account.
  • The post-closing trial balance differs from the adjusted trial balance in only two important respects: It excludes all temporary accounts since they have been closed, and it updates the retained earnings account to its proper ending balance.

• Dividends Payable

  • When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be distributed to shareholders as dividends.
  • Many corporations retain a portion of their earnings and pay out the remaining earnings as a dividend.
  • The per share dividend amount is multiplied by the number of shares outstanding and this result is debited to retained earnings and credited to dividends payable.

• Relationships Between Statements

  • Each statement has a specific purpose; the income statement reflects a company's profitability, while the statement of retained earnings shows the change in retained earnings between the beginning and end of a period (e.g., a month or a year).
  • The income statement reports the profitability of a business by comparing the revenues earned with the expenses incurred to produce these revenues.
  • The statement of shareholder's equity explains the changes in retained earnings between two balance sheet dates.

• LIFO Method

  • A merchandising company can prepare an accurate income statement, statements of retained earnings, and balance sheets only if its inventory is correctly valued.
  • Since the cost of goods sold figure affects the company's net income, it also affects the balance of retained earnings on the statement of retained earnings.
  • On the balance sheet, incorrect inventory amounts affect both the reported ending inventory and retained earnings.

• Financial Statement Notes

  • While the Income Statement, Balance Sheet, Cash Flow Statement, and Statement of Retained Earning contain all numeric information about the company, these numbers often require a better explanation.

• Times Interest Earned Ratio

  • Times Interest Earned Ratio = (EBIT or EBITDA) / (Required Interest Payments), and is indicative of a company's financial strength.
  • Times Interest Earned Ratio = Earnings before Interest and Taxes (EBIT) / Interest Expense.
  • Analysts will sometimes use EBITDA instead of EBIT when calculating the Times Interest Earned Ratio.
  • Typically, a Times Interest Earned Ratio below 2.5 is considered a warning sign of financial distress.
  • The Times Interest Earned Ratio is an indication of a company's overall financial health.