Question

How is net income connected to retained earnings and how does the Statement of Retained Earnings help the reader of financial statements understand a company’s past performance? What could you conclude about a company who ended their 3^rd year of operations with a Net Loss of $20,000 but that has an ending balance in retained earnings of $50,000? Describe a scenario that could explain how these results are possible.

Content, concept application, and writing quality will impact your grade. There is no required minimum or maximum response length. Please use complete sentences and proper punctuation.

Answer 1

Retained Earnings means accumulated balance of Net Incomes earned during set of accounting periods. In the present scenario, the retained earnings are total of net incomes earned during first two years of operations due to net loss in third year of operation, there will be decrease in retained earnings to the extent of net loss of 3 rd year. Balance of retained earnings (beginning of Yr 3) $ Less: Net Loss in Year 3 50,000.00 (20,000.00) Balance of Retained Earnings at End of Year 3 $ 30,000.00 If we have information of retained earnings , we can conclude that the third year of operation not well but overall performance of the company is good. Without having information of Retained earnings, we can conclude based on result of Year 3 that is loss of $20,000.,means poor performance. So, it is important to consider previous performance of the company befor taking decision. Retained Earnings information provides previous performance of the company. That is importance of Retained Earnings balance.