Is Retained Earnings a Current Asset?

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One way to assess how successful a company is in using retained money is to look at a key factor called retained earnings to market value. It is calculated over a period of time (usually a couple of years) and assesses the change in stock price against the net earnings retained by the company. For this reason, retained earnings decrease when a company either loses money or pays dividends and increase when new profits are created. If a company undergoes liquidation, it will repay the retained earnings balance to shareholders.

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So to begin calculating your current retained earnings, you need to know what they were at the beginning of the time period you’re calculating (usually, the previous quarter or year). You can find the beginning retained earnings on your Balance Sheet for the prior period. The disadvantage of retained earnings is that the retained earnings figure alone doesn’t provide any material information about the company.

Example of Retained Earnings Calculation

These programs are designed to assist small businesses with creating financial statements, including retained earnings. Positive retained earnings signify financial stability and the ability to reinvest in the company’s growth. This usually gives companies more options to fund expansions and other initiatives without relying on high-interest loans or other debt. Shareholders equity—also stockholders’ equity—is important if you are selling your business, or planning to bring on new investors.

However, it includes various stages based on the elements of the retained earnings formula. When a company conducts business, it will generate profits or losses. If a business sold all of its assets and used the cash to pay all liabilities, the leftover cash would equal the equity balance. When one company buys another, the purchaser buys the equity section of the balance sheet. That said, retained earnings can be used to purchase assets such as equipment and inventory.

Retained Earnings vs. Net Income

Retained earnings differ from revenue because they are reported on different financial statements. Retained earnings resides on the balance sheet in the form of residual value of the company, while revenue resides on the income statement. Retained earnings is calculated as the beginning balance ($5,000) plus net income (+$4,000) less dividends paid (-$2,000). The company would now have $7,000 of retained earnings at the end of the period. The increase in retained earnings can be found by subtracting the $40,000 in dividend payments from the $100,000 in net income the company earned, which equals $60,000.

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The term retained means that funds were not paid to shareholders as dividends instead of being held by the corporation. Cash dividends are a cash outflow from the company, reducing its cash balance. Usually, companies issue dividends at a specific rate on a fixed schedule. Despite this, companies often stick to this schedule because missing dividend payments can indicate financial woes. After all, shareholders are the ones who are entitled to dividends and hold equity in the company.