You are watching: Which of the following appears on both the income statement and statement of retained earnings?
Amy is an ACA and the CEO and founder of OnPoint Learning, a financial training company delivering training to financial professionals. She has nearly two decades of experience in the financial industry and as a financial instructor for industry professionals and individuals.
Retained earningsare the cumulative net earnings or profit of a company after paying dividends.Retained earnings are the net earnings after dividends that are available for reinvestment back into thecompanyor to pay down debt.Since theyrepresent acompany"s remainder of earnings not paid out in dividends, they are often referred toas retained surplus.
Retained earnings are an equity balance and as such are included within the equity section of a company"s balance sheet.
Movements in a company"s equity balances are shown in a company"s statement of changes in equity, which is a supplementary statement that publicly traded companies are required to show. In this statement, a company would show the retained earnings at the beginning of the period, any items that have increased the retained earnings (for example net income), any items that have reduced retained earnings (for example, if a dividend has been declared) and the ending retained earnings. Both the beginning and ending retained earnings would be visible on the company"s balance sheet. As such, the statement of changes in equity is an explanatory statement.
The calculation of retained earnings adds net income to beginning retained earnings for the periodand subtracts dividends tobe paid to shareholders. The formula is as follows:
RetainedEarnings=RE+NI−Dwhere:RE=beginningretainedearningsNI=netincomeD=dividendseginaligned & extRetained Earnings = RE + NI - D\ & extbfwhere:\ &RE= extbeginning retained earnings\ &NI= extnet income\ &D= extdividends\ endalignedRetainedEarnings=RE+NI−Dwhere:RE=beginningretainedearningsNI=netincomeD=dividends
If a company has a net loss for the accounting period, a company"s retained earnings statement shows a negative balance or deficit. Alternatively, a positive balance is a surplus or retained profit.
The statement alsodelineates changes innet incomeover a given period, which may be as often as every three months, but not less than annually.Since the statement of retained earnings is such a short statement, it sometimesappears at the bottom of the income statement after net income.
Investorspay close attention to retained earnings since the accountshows how much money is available for reinvestment back in the companyand how much is available to pay dividends to shareholders.
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