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

Which of the following is true regarding the internal growth rate as it relates to retained earnings?

The internal growth rate measures the increase in dividends paid to shareholders each year.

The internal growth rate is only relevant for companies that do not retain any earnings.

The internal growth rate is calculated by dividing total assets by total liabilities.

The internal growth rate represents the maximum rate at which a firm can grow its assets without external financing, relying only on retained earnings.

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Verified step by step guidance

Understand the concept of internal growth rate: The internal growth rate represents the maximum rate at which a firm can grow its assets without relying on external financing, using only retained earnings.

Clarify the incorrect options: The internal growth rate does not measure the increase in dividends paid to shareholders, nor is it relevant only for companies that do not retain earnings. Additionally, it is not calculated by dividing total assets by total liabilities.

Recognize the correct definition: The internal growth rate is tied to retained earnings and reflects the firm's ability to grow organically without external funding.

Relate the internal growth rate to financial formulas: It is typically calculated using the formula: \( \text{Internal Growth Rate} = \frac{ROA \times b}{1 - ROA \times b} \), where \( ROA \) is Return on Assets and \( b \) is the retention ratio (portion of earnings retained).

Apply the concept: This rate is useful for understanding how much a firm can expand its operations and assets using its own resources, emphasizing the importance of retained earnings in sustainable growth.