Econ 351 Retained Earnings Formula/Income Statement

Retained Earnings Formula Drawn Out (5 steps)

1. Gross Profits On Sales (Revenue-Price x Quantity)-Costs 2. EBIT (Earnings Before Interest and Taxes) (Gross Profit)-(AE)-(DP) Gross Profit-# from step 1 AE-"administrative expense"-->expenses not tied to specific functions (salaries, company accounting) DP-"depreciative expense"-->wear/tear on assets (machinery) 3.) Taxable Income (EBIT)-(Interest Expense) EBIT-# from step 2 Interest Expense-"monthly interest"-->payable on any types of borrowings-bonds, loans, convertible debt, or lines of credit-->basically paying off all our debts. 4.) Net Income Available for Dividends (Taxable Income)-(Taxes on "TI") Taxable Income-# from step 3 Taxes on TI-what the govn't takes in %. 5.) Retained Earnings(-the main-profit loss income statement) (Net Income Available for Dividends)-(Dividends) NIAD-# from step 4 Dividends-preferred stock (debt component) and common stock

Retained Earnings

the % of net earnings not paid out as dividends, but retained by the company to be reinvested in its core business, or to pay debt. Recorded under the shareholder's equity on the balance sheet.

Retained Earnings Formula (RE)

[(RE)=Beginning RE+Net Income-Dividends]

Dividends

a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. (usually offered to stockholders) (Not for new companies) (Not guaranteed by company)

Shareholders Equity

a firms total assets minus a firms total liabilities (Total Assets)-(Total Liabilities)

Prefered Share

a security/stock that entitles the holder to a fixed dividend. Payment takes priority over that of common-stock dividends. elite stocks, in my own words.

Common Share

a security/stock that represents ownership in a corporation (these are normal stocks when a company goes public).