RETAINED EARNING Prepared BY: MAHMOUD ABO KMIAL

Retained Earnings When a corporation makes a profit, it can spend that profit in two ways: a) return the profits to stockholders by way of dividends, share buy-backs or bonus issues. b) use the money to increase the profitability of the company What Does Retained Earnings Mean? 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. It is recorded under shareholders' equity on the balance sheet. What Does Retained Earnings Mean? 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. It is recorded under shareholders' equity on the balance sheet.

Retained Earnings The formula calculates retained earnings by adding net income to beginning retained earnings and subtracting any dividends paid to shareholders:

Austin Driving School, Inc. Partial Balance Sheet December 31, 2008 Stockholders ’ Equity Paid in Capital: Common Stock $20,000 Paid in Capital in Excess of Par, Common180,000 Paid in Capital from Treasury Stock Transactions3,600 Total Paid in Capital$203,600 Total Paid in Capital$203,600 Retained Earnings100,000 Subtotal$303,600 Subtotal$303,600 Less Treasury Stock (400 shares at cost)5,600 Total Stockholders ’ Equity$298,000

Retained Earnings Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet Therefore, the statement of retained earnings uses information from the income statement and provides information to the balance sheet Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity," Retained earnings are part of the balance sheet (another basic financial statement) under "stockholders equity," The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period. The retained earnings account on the balance sheet is said to represent an "accumulation of earnings" since net profits and losses are added/subtracted from the account from period to period.

Retained Earnings In broad terms, capital retained is used to maintain existing operations or to increase sales and profits by growing the business. In broad terms, capital retained is used to maintain existing operations or to increase sales and profits by growing the business. In other words, a company that aims to grow must be able to put its money to work In other words, a company that aims to grow must be able to put its money to work Retained earnings should boost company value and, in turn, boost the value of the amount of money you invest into it. The trouble is that most companies use their retained earnings for maintaining the status quo. If a company can use its retained earnings to produce above-average returns, then it is better off keeping those earnings instead of paying them out to shareholders Retained earnings should boost company value and, in turn, boost the value of the amount of money you invest into it. The trouble is that most companies use their retained earnings for maintaining the status quo. If a company can use its retained earnings to produce above-average returns, then it is better off keeping those earnings instead of paying them out to shareholders

Evaluation of retained earnings When evaluating the return on retained earnings, you need to determine whether it's worth it for a company to keep its profits. If a company reinvests retained capital and doesn't enjoy significant growth, investors would probably be better served if the board of directors declared a dividend. When evaluating the return on retained earnings, you need to determine whether it's worth it for a company to keep its profits. If a company reinvests retained capital and doesn't enjoy significant growth, investors would probably be better served if the board of directors declared a dividend.

Evaluation of retained earnings Another way to evaluate the effectiveness of management in its use of retained capital is to measure how much market value has been added by the company's retention of capital Evaluating by Market Value

Important of retained earning It is important to understand that retained earnings do not represent surplus cash or cash left over after the payment of dividends. Rather, retained earnings demonstrate what a company did with its profits; they are the amount of profit the company has reinvested in the business since its inception. These reinvestments are either asset purchases or liability reductions. It is important to understand that retained earnings do not represent surplus cash or cash left over after the payment of dividends. Rather, retained earnings demonstrate what a company did with its profits; they are the amount of profit the company has reinvested in the business since its inception. These reinvestments are either asset purchases or liability reductions.

Important of retained earning Capital-intensive industries and growing industries tend to retain more of their earnings than other industries because they require more asset investment just to operate, older companies may report significantly higher retained earnings than identical younger ones Capital-intensive industries and growing industries tend to retain more of their earnings than other industries because they require more asset investment just to operate, older companies may report significantly higher retained earnings than identical younger ones importance of retained earnings as a source of funds for growth importance of retained earnings as a source of funds for growth

Important of retained earning important to note that the retained earnings will enter the wealth of the investor important to note that the retained earnings will enter the wealth of the investor

Conclusion For stable companies with long operating histories, measuring the ability of management to employ retained capital profitably is relatively straightforward. Before buying, investors need to ask themselves not only whether a company can make profits, but whether management can be trusted to generate growth with those profits.