4. Retained Earning
Definition
“The percentage of net earnings not paid out as
dividends, but retained by the company to be
reinvested in its core business or to pay debt”
Formula
Retained Earning (R.E)= Begning Retained Earning + Net income -Dividends
(R.E ) Also known as the "retention ratio" or "retained surplus".
5. Purposes Of Retained Earnings
1 . Accumulation Of Earnings
2. Investment in Fixed assets
3.
To meet working capital needs
6. Calculation f Retained Earning
Suppose a company ABC Having
Net Profits In current accounting period = $ 5,00000
Dividends pay out
= $ 1,50000
Beginning Retained Earning
= $ 12,00000
Ending Retained Earnings
= ???
Solution
Begning Retained Earnings
+Net Income (Current Accounting Period)
-Dividends pay out
Ending Retained Earning
$ 12,00000
+ $ 5,00000
-------------$ 17,00000
- $ 1,50000
-------------$ 15,50000
8. Step By Step Calculation Of Retained Earnings
1.
Gross Profit
= Sale – C.G.S
2. Operating Income
= Gross Profit – operating Expenses
3. Pre-tex net income
= operating income – interest –
4. After Tex Net Income
Depreciation – Amortization
= Pre tex net income – Taxes
5. Retained Earning (Current Period )= After Tex net income – Dividends
6. Retainned Earning(Ending Balance) = Retained Earning(Current Period )
+ Account balance (Opening Balance)
9. Dividends:“Benefits Provided To the Investors are Called The
Dividends
”
OR
“A sum of money paid regularly (typically annually) by
a company to its shareholders out of its profits (or
reserves)”
Ways of The dividends Payment
Cash Dividends
2. Stock Dividends
3. Liquidating Dividends
1.
10. Payments of Dividends Out Of
1) Retained Earnings
2) Cash Balance
(1st
Focuse )
(2nd Focuse )
3) Organization Directors
(3rd Focuse )
