A:

Retained earnings are the portion of a company's income that management retains for internal operations instead of paying it to owners in form of dividends. The statement of retained earnings, a basic financial statement under generally accepted accounting principles (GAAP) rules, explains changes in retained earnings over the reporting period - usually the fiscal year. Retained earnings are calculated by adding net income and subtracting dividends from the balance of retained earnings at the beginning of the period.

For example: If you had $5000 when the reporting period started and at the end of the period you realized $4000 in net income and paid out $2000 in dividends, your retained earnings at the end of the period will be:

Retained Earnings = Beginning Balance + Net Income – Dividends

Retained Earnings = $5000 + $4000 - $2000 = $7000.

Essentially, the statement of retained earnings is affected by any transaction that affects net income and dividends. So, when total dividends paid out is increased or decreased, there is a definite effect on the statement of retained earnings. Anything that affects net income, also affects the statement of retained earnings. Some transactions that affect net income include those that increase or decrease in revenue, cost of goods sold and expenses.

Be investment-savvy and learn how to analyze this often overlooked information: Evaluating Retained Earnings: What Gets Kept Counts.

This question was answered by Chizoba Morah.

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