Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

12. Stockholders' Equity

Retained Earnings

Financial Accounting

12. Stockholders' Equity

Retained Earnings

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Multiple Choice

One advantage of using retained earnings as a long-term source of funds is:

It reduces the company's cash balance.

It dilutes the ownership of existing shareholders.

It does not require the company to pay interest or dividends to external parties.

It increases the company's financial leverage.

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Verified step by step guidance

Understand the concept of retained earnings: Retained earnings are the portion of a company's net income that is not distributed as dividends but is retained for reinvestment in the business or to pay off debt.

Recognize the advantages of using retained earnings as a source of funding: Retained earnings are an internal source of funds, meaning the company does not need to borrow money or issue new shares to raise capital.

Analyze the implications of using retained earnings: Since retained earnings are internal funds, they do not require the company to pay interest (as with debt) or dividends (as with issuing new shares). This makes them cost-effective compared to external financing options.

Evaluate the impact on shareholder ownership: Using retained earnings does not dilute the ownership of existing shareholders, unlike issuing new shares, which would reduce the percentage of ownership for current shareholders.

Conclude why retained earnings do not increase financial leverage: Financial leverage refers to the use of debt to amplify returns. Since retained earnings are not borrowed funds, they do not contribute to financial leverage but rather reduce reliance on external debt.