Retained Earnings

1. Define “retained earnings” and explain its composition.

2. Define “capital stock” and explain the meaning of its reported account balance.

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3. Understand the lack of financial impact that the exchange of ownership shares between investors has on a company.

Question: What information does a retained earnings balance communicate to an

outside decision maker? For example, on January 31, 2009, Barnes & Noble reported retained earnings of nearly

$721 million, one of the larger amounts found in the company’s financial statements. What does that figure tell

decision makers about this bookstore chain?

Answer: Retained earnings is one of the most misunderstood accounts in all of financial reporting. In simplest

terms, this balance is merely the total amount of net income reported by a company since it first began operations,

less all dividends paid to stockholders during that same period. Thus, the figure provides a measure of the profits

left in a business throughout its history to create growth.