Question

Typically, the statement of stockholders' equity starts with total stockholders’ equity at the beginning of the year, adds net income, subtracts dividends paid, and ends up with total stockholders’ equity at the end of the year. Over time, a profitable company will have earnings in excess of the dividends it pays out, and will result in a substantial amount of retained earnings shown on the balance sheet.True / False.

Answer 1

The correct answer is True.

Step-by-step explanation:

Retained earnings are those net profits that the company decides not to distribute as dividends among its shareholders.

The retained earnings are dedicated to reinvestment in the form of equipment, research and development and other elements such as paying financial obligations. One of the purposes, in addition, is to preserve the liquidity of the company.

Many companies resort to retained earnings as a way to finance the company, as it is an effective way to avoid the outflow of money and have to resort to new obligations (that is, more indebtedness).