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

On a balance sheet, retained earnings are not considered unspent cash because:

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

Retained earnings are always distributed as dividends to shareholders.

Retained earnings are recorded only when a company borrows money.

Retained earnings represent the cumulative net income that has been reinvested in the business, not the actual cash on hand.

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Verified step by step guidance

Understand the concept of retained earnings: Retained earnings represent the cumulative net income of a company that has been reinvested in the business rather than distributed as dividends to shareholders. It is an equity account on the balance sheet.

Clarify why retained earnings are not unspent cash: Retained earnings are an accounting measure and do not directly represent cash. They reflect the portion of net income retained for reinvestment, which could be used for various purposes such as purchasing assets, paying off liabilities, or funding operations.

Distinguish retained earnings from total revenue: Total revenue refers to the income generated from the company's operations during a specific period, while retained earnings are the accumulated net income after deducting expenses, taxes, and dividends over time.

Explain the relationship between retained earnings and dividends: Retained earnings are not always distributed as dividends. Companies may choose to retain earnings to reinvest in growth opportunities or strengthen their financial position.

Highlight the misconception about borrowing: Retained earnings are not recorded when a company borrows money. Borrowing creates liabilities, whereas retained earnings are derived from the company's profitability and reinvestment decisions.