Question

For years Microsoft did not pay dividends to its shareholders. Instead it held back these profits to be used for future growth or expansion. These undistributed profits are referred to

1. ascurrent assets.
2. owners' equity.
3. retained earnings.
4. dividends payable

Answer 1

3. retained earnings.

Step-by-step explanation:

When a company earns profit, taxes are deducted to find the net profit or net earnings. From these, it pays dividends at a certain dividend payout ratio; which is usually dividends/ net profit. Whatever remains is reinvested back into the company for funding potential profitable projects and other expansions and are referred to as retained earnings. This gives the retention rate which is basically (1 - payout ratio).