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Questions and Answers
What are retained earnings?
What are retained earnings?
Retained earnings are the portion of a company's profits that are kept by the company instead of being distributed as dividends to shareholders.
What factors affect the amount of retained earnings?
What factors affect the amount of retained earnings?
The amount of retained earnings is affected by net income or loss, dividends paid to shareholders, prior period adjustments, and changes in accounting policies.
How do dividends paid to shareholders affect retained earnings?
How do dividends paid to shareholders affect retained earnings?
When a company pays dividends to shareholders, the amount of the dividend is subtracted from the beginning balance of retained earnings, which reduces the amount of profits that are retained by the company.
Study Notes
Retained Earnings
- Retained earnings represent the profits that a company has chosen to retain and reinvest in the business, rather than distributing them to shareholders as dividends.
Factors Affecting Retained Earnings
- Net income: Retained earnings increase when a company generates a net income, and decrease when a company incurs a net loss.
- Dividends: Payment of dividends reduces retained earnings.
- Prior period adjustments: Corrections of errors or changes in accounting estimates can also affect retained earnings.
Impact of Dividends on Retained Earnings
- Dividends paid to shareholders reduce retained earnings, as the dividend payment is subtracted from retained earnings.
- The reduction in retained earnings is equal to the amount of dividends paid out.
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Description
Test your knowledge about retained earnings and the factors that affect them with this quiz! Learn about net income or loss, dividends, prior period adjustments, and changes in accounting policies that impact the amount of retained earnings. Sharpen your understanding of the Statement of Changes in Equity and dividends paid to shareholders. Put your knowledge to the test and see how much you know about retained earnings.
