Definition
The Statement of Retained Earnings, also known as the Statement of Owner’s Equity, is a financial document that shows changes in a company’s retained earnings over a specific period. It includes net income earned during that time and any dividends paid out to shareholders. This statement helps investors understand how the company’s profits are being used, either by reinvesting in the business or distributing profits to shareholders.
Phonetic
Statement of Retained Earnings Phonetic pronunciation will be like: Steyt-ment ov Rih-teynd Ur-ningz
Key Takeaways
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- Understanding of Business Profits: Statement of Retained Earnings helps one understand how profits have been utilized by a business. It tracks the profits that are retained within the organization rather than being distributed among shareholders as dividends.
- Insights into Business Investments: This statement provides insight into how much investment a company is putting back into its own growth. It is a valuable tool for investors and stakeholders to understand the company’s reinvestment strategy or if the company is effectively using its retained earnings for further growth.
- Track Dividend Trends: Lastly, this statement helps analysts and investors assess the company’s dividend payment pattern. It can reflect the behavior of the company towards its shareholders, such as if they are generous in paying dividends or if they mostly retain earnings for reinvestment.
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Importance
The Statement of Retained Earnings is a crucial document in business finance as it provides a detailed overview of the changes in a company’s retained earnings over a specific period. This statement is important because it shows how the business’s profits were reinvested back into the company, or how they were distributed to shareholders as dividends or used to cover any losses. By tracking and analyzing these trends over time, stakeholders such as investors, creditors, and management can gain insightful information about the company’s profitability, dividend distribution, and overall financial health. Consequently, this contributes to informed decision-making, strategic financial planning, and accurate evaluation of the company’s performance and growth potential.
Explanation
The Statement of Retained Earnings, also known as the Statement of Owner’s Equity or Equity Statement, plays a critical role in understanding the financial health of a business, by representing changes in the equity section of a company’s balance sheet over a set accounting period. This document primarily determines how the profits retained in the business over a specified period have been utilized—whether they have been reinvested in the business or paid out to shareholders as dividends.The purpose of a Statement of retained earnings is to depict the movement and allocation of profits within a business, serving as an essential decision-making tool for stakeholders and potential investors. It provides insight into a company’s financial stability, as well as its capacity to fund ongoing business operations, pay dividends, or finance new ventures without external financing. For the internal management team, this statement offers valuable data for strategic planning. In essence, it communicates the company’s financial strategies and successes over that period to anyone evaluating its financial status.
Examples
1. Amazon Inc.: As one of the largest businesses globally, Amazon Inc. releases periodic Statements of Retained Earnings, which shows how much of its net income was kept to reinvest in the business rather than being paid out as dividends. In 2020, Amazon had a retained earnings balance of $93.404 billion, up from $62.950 billion in 2019, indicating massive reinvestment and internal growth within the company.2. Apple Inc.: Apple is another example of a company frequently publishing its Statement of Retained Earnings within its annual report. At the end of their fiscal year in 2020, Apple’s retained earnings totaled around $14,531,000,000. This clearly highlighted how much of their income from that fiscal year was retained for reinvestment and is indicative of the company’s future growth.3. Walmart Inc: As a multi-national retail corporation, Walmart’s Statement of Retained Earnings is a part of its publicly available annual report. For instance, in January 2021, their statement showed a total retained earnings balance of $72.394 billion. This demonstrates how much profit the company has decided to retain for growth and expansion purposes, instead of paying it out as dividends to shareholders.
Frequently Asked Questions(FAQ)
What is a Statement of Retained Earnings?
A Statement of Retained Earnings is a financial document that companies use to report the changes in their retained earnings over a specific period. It is also known as the Statement of Owner’s Equity or the Equity Statement.
What is the significance of the Statement of Retained Earnings?
It provides insight into a company’s profitability over a given period and shows how much of the profits were reinvested in the business, rather than distributed as dividends. This is important to investors as it provides a clear picture of a company’s financial health.
How is the Statement of Retained Earnings calculated?
It starts with the retained earnings balance at the beginning of the period, adds net income, subtracts any dividends paid to shareholders, and adjusts for other gains or losses to give the ending retained earnings balance.
Where can a Statement of Retained Earnings be found?
It is generally included as part of a company’s financial statements, which may be found in its annual or quarterly reports.
What does it mean if a company has negative retained earnings?
Negative retained earnings indicate that a company has more debt than accumulated profits. This could be the result of sustained business losses or large dividend payments that exceed the company’s accumulated net income.
How do investors use the Statement of Retained Earnings?
Investors use it to analyze how well a company is managing its profits. If a company consistently generates more profit and retains a good portion of it, that could signal a potentially good investment.
Can a company have too much retained earnings?
While having retained earnings means the company has profits it can reinvest, having too much might indicate it’s not effectively using its profits for growth, and could even become a target for corporate takeovers.
What’s the difference between the Statement of Retained Earnings and a Balance Sheet?
A balance sheet gives an overview of a company’s assets, liabilities, and shareholders’ equity at a given point in time. The Statement of Retained Earnings, on the other hand, specifically focuses on the changes in the company’s retained earnings over a certain period.
Related Finance Terms
- Retained Profits
- Dividends
- Net Income
- Shareholder’s Equity
- Financial Year
