1.4 Retained earnings, balance sheet

Stockholders' equity is comprised of two parts:

(1) common stock and (2) retained earnings

Claims to assets are subdivided into two categories

claims of creditors and claims of owners.

remember common stock and retained earnings

common stock results when the company sells new shares of stock; retained earnings is the net income retained in the corporation.

balance sheet

reports assets and claims to assets at a specific point in time. (assets= liabilities+ stock holders equity)

retained earnings statement

shows the amounts and causes of changes in retained earnings for a specific time period. The time period is the same as that covered by the income statement. The beginning retained earnings amount appears on the first line of the statement. Then, the company adds net income and deducts dividends to determine the retained earnings at the end of the period. If a company has a net loss, it deducts (rather than adds) that amount in the retained earnings statement..

relationship between statements

1. The retained earnings statement uses the results of the income statement. Tootsie Roll reported net income of $43,938,000 for the period. Net income is added to the beginning amount of retained earnings to determine ending retained earnings. 2. The balance sheet and retained earnings statement are also interrelated. Tootsie Roll reports the ending amount of $114,269,000 on the retained earnings statement as the retained earnings amount on the balance sheet. 3. Finally, the statement of cash flows relates to information on the balance sheet. The statement of cash flows shows how the Cash account changed during the period. It shows the amount of cash at the beginning of the period, the sources and uses of cash during the period, and the $78,612,000 of cash at the end of the period. The ending amount of cash shown on the statement of cash flows must agree with the amount of cash on the balance sheet.

claims of creditors

are called liabilities

The owners' claim to assets

is called stockholders' equity

retained earnings

is the net income retained in the corporation.

The primary purpose of a statement of cash flows

is to provide financial information about the cash receipts and cash payments of a business for a specific period of time. To help investors, creditors, and others in their analysis of a company's cash position, the statement of cash flows reports the cash effects of a company's operating, investing, and financing activities. In addition, the statement shows the net increase or decrease in cash during the period, and the amount of cash at the end of the period.