Retained earnings represent what in a corporation?

Retained earnings represent what in a corporation?

• A. The cumulative cash retained in the company
• B. The cumulative net income retained in the company after dividends
• C. The market value of equity minus cash
• D. The total revenue minus expenses

Answer: (A)

Retained earnings show the cumulative profits a company has kept in the business after paying dividends. They sit on the balance sheet as part of shareholders’ equity and accumulate over time as each period’s net income is added and any dividends are subtracted. They rise when net income exceeds dividends and fall when the company incurs losses or pays out more in dividends than it earns. They are not the cash the company holds, nor the market value of equity. They also aren’t simply net income for a single period (revenue minus expenses for that period); they represent the total amount of earnings that has been retained since inception. The description that expresses retained earnings as the cumulative net income retained after dividends best captures the concept.

Retained earnings show the cumulative profits a company has kept in the business after paying dividends. They sit on the balance sheet as part of shareholders’ equity and accumulate over time as each period’s net income is added and any dividends are subtracted. They rise when net income exceeds dividends and fall when the company incurs losses or pays out more in dividends than it earns. They are not the cash the company holds, nor the market value of equity. They also aren’t simply net income for a single period (revenue minus expenses for that period); they represent the total amount of earnings that has been retained since inception. The description that expresses retained earnings as the cumulative net income retained after dividends best captures the concept.