Question

5) Cash and Profit a) Is cash the same thing as profit? a) How is profit calculated? a) Is cash the same thing as retained earnings? b) What one thing will cause Retained Earnings to increase? c) What two things cause Retained Earnings to decrease? d) Is Retained Earnings the same thing as common stock and additional paid-in capital? e) Where on the balance sheet should a person look to find Retained Earnings? f) Why should the board of directors check the Retained Earnings balance before declaring dividends? g) Why should the board of directors check the cash account and future cash needs before declaring a dividend? h) What bad thing can happen to the board of directors if the board is negligent in regard to declaring a dividend? i) What is restricted retained earnings? j) Can the board of directors voluntarily restrict retained earnings? If the board of directors voluntarily restricts retained earnings, can the board of directors voluntarily un-restrict retained earnings. k) What is a prior period adjustment? 1) If a company has a prior period adjustment, where on the financial statements will someone find the adjustment?

Answer 1

5
a) No cash is not same thing as profit, since profit is calculated which involves non cash revenues and non cash expenditures. Profit also excludes cash involved in financing and investing activities.

b) Profit is calculating by deducting Expenses from the Revenues for the period concerned.

c) Cash is not same as retained earnings, since retained earnings is cumulation of profits earned over the period which is not distributed to shareholders.

d) Net Income will increase the Retained Earnings

e) Declaration of dividend and Loss from business will decrease the Retained Earnings

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