How to Read Financial Statements - Part 4 of 4 - The Retained Earnings

The Statement of Retained Earnings

DISCLAIMER -  I am not a Financial Advisor and do not work for any Brokerage Firm.   The opinions given are of my own and are not to be used as professional advice.  These are my findings and can hopefully help you to make informed decisions on investing.   Consult a Broker or Lawyer before making any investment.

Statement of Retained Earnings

According to AccountingTools.com, the statement of retained earnings presents changes in equity during the reporting period. The report format varies, but can include the sale or repurchase of shares, dividend payments, and changes caused by reported profits or losses. This is the least used of the financial statements, and is commonly only included in the audited financial statement package.

When the financial statements are issued internally, the management team usually only sees the income statement and balance sheet, since these documents are relatively easy to prepare.

The general calculation structure of the statement is shown below:

Beginning retained earnings + Net income - Dividends = Ending retained earnings

The statement of retained earnings is most commonly presented as a separate statement, but can also be appended to the bottom of another financial statement.

How to Prepare a Statement of Retained Earnings

Most organizations are content to only report retained earnings within the equity section of the balance sheet. If so, and you are using accounting software, then just print the standard balance sheet report. You can achieve the same result with a manual accounting system by preparing the balance sheet from the trial balance report. If you want to break out retained earnings into a separate report, this typically involves a manual preparation that requires the following steps:

1. List your beginning retained earnings figure in the top row of the statement.

2. State your current net income figure in the second row of the statement.

3. List a deduction for dividends paid in the third row of the statement.

4. Net the preceding line items into an ending retained earnings figure in the fourth row of the statement.

Advantages of the Statement of Retained Earnings

A key advantage of the statement of retained earnings is that it shows how management chooses to redirect the retained earnings of a business. It may indicate that funds are being allocated to the acquisition of more assets, or perhaps sent to investors in the form of dividend payments or stock repurchases. Thus, it can provide a general indication of how management wants to use excess funds.

See example of the Statement of Returned Earnings below this article.

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