Retained Earnings

Definition

• Retained earnings represent the portion of a company's cumulative historical profits not distributed to shareholders as dividends.
• "Retain" means to keep, and "earnings" means profit.

Importance in Financial Statements

• Retained earnings appear on the balance sheet as part of shareholder's equity.
• They connect the income statement (profitability over a period) and the balance sheet (financial position at a point in time).

Components

• Part of equity on the balance sheet.
• On the credit side, representing an obligation to shareholders or as a balance plug to balance assets and liabilities.

Calculation

• Retained earnings are calculated by taking the beginning balance, adding net income, and subtracting dividends.

Examples

Verizon (2016)

• Equity: $17.8 billion in 2015, $24 billion in 2016.
• Retained Earnings/Reinvested Earnings: $11.2 billion in 2015, $15.1 billion in 2016.
• Net income attributable to Verizon was $13.1 billion.
• Retained Earnings increase: beginning retained earnings + net income - dividends.

Apple Inc (Fiscal Year 2017)

• Equity: $128.2 billion (2016), $134 billion (2017).
• Retained Earnings: $96.4 billion (2016) to $98.3 billion (2017).
• Net income increases retained earnings; dividends and stock repurchase decrease them.

Additional Insights

• Retained earnings contain both gains and losses.
• Accumulated Deficit: Negative retained earnings, appearing as a debit balance, indicating possible financial distress.

Conclusion

• Retained earnings are essential for understanding a company’s profitability and financial health.
• The opposite of retained earnings can be thought of as having "empty pockets" or an accumulated deficit.