Definition
A Statement of Retained Earnings is a financial document that outlines the changes in a company’s retained earnings over a certain period. It typically includes the beginning balance of retained earnings, adds the net income or loss, subtracts dividends paid out, and then calculates the ending balance. Examples could be from any business, but they all follow this similar structure and process.
Key Takeaways
- The Statement of Retained Earnings is a financial document that outlines the changes in retained earnings for a specified period. It includes the net income earned by the company and any dividends paid out.
- Common examples of items included in the Statement of Retained Earnings include beginning retained earnings, net income or net loss, dividends paid, and retained earnings at the end of the accounting period.
- This statement is invaluable in providing shareholders and potential investors vital information about how a business reinvests its profits, giving insight on the company’s profitability, dividend distribution, and strategy for growth or debt repayment.
Importance
The finance term “Statement of Retained Earnings Examples” is significant because it provides a detailed account of changes in a company’s retained earnings over a specific period.
It reveals the net income gained or losses incurred, dividends distributed, and any other amounts that were added or deducted during that period.
By evaluating this statement, stakeholders and potential investors can gain insights into the company’s financial health and the management’s decisions about distributing dividends versus retaining profits for further business growth.
Thus, these examples serve as a valuable tool for analyzing a company’s operational efficiency and fiscal management.
Explanation
The Statement of Retained Earnings serves a critical role in providing insight into a corporation’s financial health and operational efficiency over a specific period. This financial statement is utilized to track changes in a firm’s retained earnings, which is the portion of net income that is not distributed as dividends to shareholders but held back by the company for reinvestment or to pay off debt.
This allows investors, stakeholders, and company owners to understand how the company’s earnings are being utilized, and to assess if the retention of these earnings is contributing positively towards the company’s overall growth and profitability. Additionally, the Statement of Retained Earnings can be a significant indicator of a company’s long-term financial strategy.
By examining where the organization is investing its retained earnings, one can ascertain its priorities and objectives. For instance, if earnings are directed towards research and development, it indicates a focus on innovation and product improvement.
Conversely, if the earnings are used to pay off debt, it shines a light on the company’s approach towards risk management and fiscal responsibility. Overall, this statement is an underrated but crucial part of understanding a firm’s approach towards utilizing and managing its profits.
Examples of Statement of Retained Earnings Examples
Amazon Inc. – In the fiscal year end of 2020, Amazon Inc. presented a Statement of Retained Earnings which showed its beginning retained earnings were $96 billion. The company added $33 billion earned in the fiscal year and subtracted dividends paid of $749 million. This calculation ended in a balance of $54 billion in retained earnings for Amazon Inc.
Starbucks Corporation – For fiscal year 2020, Starbucks Corporation’s Statement of Retained Earnings showed the initial amount of $66 billion, added their net income of $3 million, and then subtracted dividends paid equating to $61 billion. By the end of the year, Starbucks showed retained earnings dropping to $
98 billion.Tesla Inc. – Tesla’s 2020 annual report revealed beginning retained earnings deficit to be around -$21 billion. The company then added a net income of $721 million for the year 2020, reducing the deficit in retained earnings to -$49 billion.These instances demonstrate how retained earnings, which are the part of a company’s net income reinvested into the company rather than paid out as dividends, can provide vital insights into a company’s ability to fund its operations and growth from its profits. Companies may use these funds to reinvest in its own operations, reduce debt or pay out dividends to its shareholders.
FAQs: Statement of Retained Earnings Examples
What is a Statement of Retained Earnings?
The Statement of Retained Earnings is a financial document often included in a company’s annual report. It outlines the changes in retained earnings for a specific period. Retained earnings are the portion of a company’s profits not distributed as dividends to shareholders but retained to reinvest in the business or pay debt.
What are some examples of a Statement of Retained Earnings?
Common examples usually start with the opening balance of retained earnings, add net income earned during the period, subtract dividends paid out, and conclude with the closing balance of retained earnings. Each organization may have a slightly different layout, but these components are a must-have in a statement of retained earnings.
Why is a Statement of Retained Earnings important?
This statement allows stakeholders to see how much of the company’s profits are being reinvested back into the business rather than being given out as dividend payments. Retained earnings can also be used for debt payments, a significant factor for creditors. So, this statement indirectly provides insights into a firm’s financial decisions.
Can retained earnings be negative?
Yes, retained earnings can be negative. This condition, known as an accumulated deficit, can occur when the sum of dividends and net losses (if any) in various periods exceeds the sum of net income in those periods.
Related Entrepreneurship Terms
- Beginning Retained Earnings: This is the amount of net income left over for the company after it has paid out dividends to its shareholders.
- Dividends: These are earnings distributed by a company to its shareholders as a reward from the profits made by the company.
- Net Income: This is the profitability amount gained during a specified period after accounting for all expenses.
- Ending Retained Earnings: This is calculated by adding the net income (or loss) and subtracting any dividends from the beginning retained earnings.
- Accumulated Retained Earnings: This refers to the sum of all the retained earnings till the current fiscal period – it is the total net income kept within the business since its existence.
Sources for More Information
- Investopedia: A comprehensive financial education website that provides articles, dictionary entries, and tutorials on a wide range of financial terms and concepts, including the statement of retained earnings.
- AccountingCoach: A site dedicated to offering free and premium accounting and bookkeeping tutorials, exercises, exams, and more, all of which can be very helpful for users understanding statement of retained earnings examples.
- Cengage: A major educational resources website that provides accounting textbooks that often include detailed examples of retained earnings statements.
- Corporate Finance Institute: A professional training and certification organization in the field of corporate finance and investment banking that provides a great deal of free online resources, such as articles, templates, and courses about different financial topics, notably the statement of retained earnings.
