Corporations may always use retained earnings as a substitute for earnings and profits.

Question

Quizplus · Accepted Answer

Retained earnings and earnings and profits (E&P) are distinct concepts in corporate finance and tax accounting. Retained earnings refer to the cumulative amount of net income left over for the business after it has paid out dividends to its shareholders. Earnings and profits, on the other hand, is a tax concept used to determine whether a distribution to shareholders is considered a dividend. While retained earnings can influence E&P, they are not always interchangeable, as E&P calculations include adjustments for tax purposes that are not reflected in retained earnings.

Corporations May Always Use Retained Earnings as a Substitute for Earnings