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 best explains why it is important for a company to monitor its retained earnings over time?

Retained earnings reflect the cumulative profits that have been reinvested in the business, which can be used for future growth or to pay dividends.

Retained earnings represent the total cash available in the company's bank accounts.

Retained earnings are the same as the company's total revenue for the year.

Retained earnings are only relevant for tax reporting purposes and do not affect business decisions.

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Verified step by step guidance

Step 1: Understand the concept of retained earnings. Retained earnings represent the cumulative profits that a company has earned over time, minus any dividends paid to shareholders. These earnings are reinvested in the business for growth or other purposes.

Step 2: Analyze the importance of monitoring retained earnings. Retained earnings provide insight into the company's ability to reinvest profits for future growth or to distribute dividends to shareholders. Monitoring this figure helps assess financial health and decision-making capacity.

Step 3: Evaluate the incorrect options. Retained earnings do not represent the total cash available in the company's bank accounts, as cash is only one component of the company's assets. Retained earnings are also not the same as total revenue for the year, as revenue is a measure of income before expenses and distributions.

Step 4: Clarify the relevance of retained earnings. Retained earnings are not solely relevant for tax reporting purposes; they play a critical role in strategic business decisions, such as funding expansion or determining dividend payouts.

Step 5: Identify the correct explanation. The correct answer is that retained earnings reflect the cumulative profits reinvested in the business, which can be used for future growth or to pay dividends. This highlights their importance in financial planning and sustainability.