If a firm has $1 000 000 in retained earnings, what does this mean?
A) That the firm had $2 000 000 at the beginning of year but paid out $1 000 000 during the year in dividends
B) That the company is owed $1 000 000 by its creditors but has not yet collected the money
C) That the firm has $1 000 000 in the bank
D) That the company's net profits less its dividend payments equals $1 000 000
E) That the company has saved $1 000 000 during the period since the last balance sheet was made up

Question

Quizplus · Accepted Answer

Retained earnings represent the cumulative net profits of a company that have not been distributed to shareholders as dividends. Therefore, if a firm has $1,000,000 in retained earnings, it means that the company's net profits less its dividend payments equal $1,000,000. Option A is incorrect because retained earnings are not affected by dividends paid during the year. Option B is irrelevant to retained earnings. Option C is also incorrect because retained earnings do not necessarily represent cash in the bank. Option E is incorrect because retained earnings are not savings, but rather earnings that have been reinvested in the business.

If a Firm Has $1 000 000 in Retained Earnings