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Statement of Retained Earnings

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 What Is a Statement of Retained Earnings?

The statement of retained earnings (retained earnings statement) is a financial statement that outlines the changes in retained earnings for a company over a specified period. This statement reconciles the beginning and ending retained earnings for the period, using information such as net income from the other financial statements, and is used by analysts to understand how corporate profits are utilized.

The statement of retained earnings is also known as a statement of owner's equity, an equity statement, or a statement of shareholders' equity. Boilerplate templates of the statement of retained earnings can be found online. It is prepared in accordance with generally accepted accounting principles (GAAP).

KEY POINTS:

  • The statement of retained earnings is a financial statement prepared by corporations that details changes in the volume of retained earnings over some period.
  • Retained earnings are profits held by a company in reserve in order to invest in future projects rather than distribute as dividends to shareholders.
  • Analysts can look at the retained earnings statement to understand how a company intends to deploy its profits for growth.

Retained Earnings:

These funds May also be referred to as retained profit, accumulated earnings, or accumulated retained earnings. Often, these retained funds are used to make a payment on any debt obligations or are reinvested into the company to promote growth and development.

Whenever a company generates surplus income, a portion of the long-term shareholders may expect some regular income in the form of dividends as a reward for putting their money in the company. Traders who look for short-term gains may also prefer getting dividend payments that offer instant gains. Dividends are paid out from profits, and so reduce retained earnings for the company.

The following options broadly cover some of the possibilities on how the surplus money allocated to retained earnings and not paid out as dividends can be utilized:

  • It can be invested to expand the existing business operations, like increasing the production capacity of the existing products or hiring more sales representatives.
  • It can be invested to launch a new product/variant, like a refrigerator maker foraying into producing air conditioners, or a chocolate cookie manufacturer launching orange- or pineapple-flavored variants.
  • The money can be utilized for any possible merger, acquisition, or partnership that leads to improved business prospects.
  • It can also be used for share buybacks.
  • The earnings can be used to repay any outstanding loan (debt) the business may have.

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