Definitions and formulas (statement of Retained Earnings -RE)

Contents of the Statement of Retained Earnings

Accumulated net income less the dividends paid to ownerd represent the reinvestments in the core business. Remember to add the ending retained earnings of the previous accounting period.

The statement of retained earnings

It covers a specified period of time, also known as accounting period. It reports the way that the net income and the distribution of dividends to stockholders affected a company's financial position during the accounting period.

Ending RE

Beginning retained earnings + net income (or - net losses) - dividends

Beginning RE

Ending retained earning for the previous accounting period

Creditors closely monitor a firm's RE statement because the firm's policy on dividend payments to the stockholders affects its ability to pay its debts. Every dollar a firm pays to stockholders as a dividend is not available for use in paying back its debts to the creditor. Investors examine RE to determine whether the company is reinvesting a sufficient portion of earnings to support future growth.

The statement of RE is a big deal to investors and creditors