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