Retained Earnings explained

[@TheFinanceStoryteller]

Enjoyed this video? Then please subscribe to the channel, and watch the related video on the statement of changes in equity (where retained earnings plays a big role!) next: kzbin.info/www/bejne/rmTFm6Vpf7WYmqc

[@Remrie]

Kudos for explaining why retained earnings are listed as liabilities even though it would appear as an asset.

[@TheFinanceStoryteller]

You're welcome! Once you understand that part, you've come a long way. Here's an exercise that I sometimes show my participants in "finance for non-financial managers" courses on how retained earnings get created at the end of the financial year: kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@ps2050]

I love your videos - both the content and the clarity of the concepts presented. Thank you for taking the time to spread the knowledge !

[@TheFinanceStoryteller]

Wonderful to hear that! Happy to help, it's great fun making these videos.

[@amaan717khan5]

tum bohot acha kaam karta hai finance bhai ! mere ko tumko thank you bolne ka hai !!!

[@TheFinanceStoryteller]

Happy to help!

[@SuperAussm]

Thata awkward moment when a 6 minute video teaches me more then a MBA class... very sad. But good for you.

[@TheFinanceStoryteller]

Happy to help! Please spread the word about the channel. Speaking of retained earnings... Here's the real world story of Apple earning $100B in net income in their latest financial year, and still managing to turn their retained earnings into an accumulated deficit on the balance sheet: kzbin.info/www/bejne/gJCUd2t9pLGCf5o

[@hydeq-nachos4974]

I think a much better analogy of income statement vs balance sheet is with the movie analogy that you started...income is like a movie from start to finish which takes a period of time to watch a movie...where as the balance sheet is a scene in the movie by pressing the pause button the scene is frozen...its more logical that way movie and scenes go together like peas always in pods...

[@TheFinanceStoryteller]

Whatever works for you! Thanks for sharing.

[@FlyBushLive]

So the retained earnings is money that’s just sitting waiting to be used for whatever the company Chooses in the future ? Or does it represent money that has been Spent already on purchasing more assets or reducing liabilities?

[@TheFinanceStoryteller]

Hello! Retained earnings is part of equity (shareholder capital), on the right hand side of the balance sheet. The counterpart to it is indeed as you said more assets on the left hand side of the balance sheet, or reduced liabilities on the right hand side. The best way to visualize it is to watch my (short) video on the relationship between balance sheet and income statement, where the company is profitable during the year, and then that profit gets added to retained earnings on the balance sheet at the end of the year: kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@FlyBushLive]

@@TheFinanceStoryteller thank you I appreciate it!!!

[@LordBeerus090]

Legendary level explanation.. Awesome awesome!!! Thank you so much!!!!

[@TheFinanceStoryteller]

Wow! Thanks for that compliment, Soumya! Much appreciated. Enjoy the videos on the channel, I have lots more that discuss various aspects of the balance sheet and other financial statements. Hope they are helpful to you!

[@LordBeerus090]

@@TheFinanceStoryteller i will 100%.. The way the explanations are made is exactly what i look for in the videos. Thank you again

[@TheFinanceStoryteller]

So happy to hear that. Yep, that's how I work... solidly grounded in reality of actual real-life companies. Take a look at my finance case studies, I think you will find lots of good information there: kzbin.info/www/bejne/hnqciWiPl8qelac

[@yosmuc]

Amazing explanation! Thank you. I was wondering (in the case of Apple and any other company) how do we find the cash balance in the statements. Apple is said to have more than $250B in cash balance. I have looked at the recent statements and I am not sure what items to build / calculate together in order to reach a company's cash balance. I believe the place to find them is under Assets of the Balance Sheet but Total Cash is $74B. I will be very thankful for your guidance. Thanks again :)

[@TheFinanceStoryteller]

I have been asking myself the same question. You have to look a bit beyond just the cash line item. Here's my video on that topic (based on September 2016 ending balance): kzbin.info/www/bejne/a5O6oJempreGj7c

[@tarunkumarreddysingampalli9207]

What a learning I almost got all my doubts clarify

[@TheFinanceStoryteller]

Happy to hear that! The best way to learn more about retained earnings (or shareholder capital in general) is to go through real world case studies. Here is the fascinating story of Apple's retained earnings: kzbin.info/www/bejne/gJCUd2t9pLGCf5o

[@nicolasrivero4722]

FANTASTIC! jaja really enjoying financials.

[@TheFinanceStoryteller]

Thank you!!! There's lots more to explore. ;-)

[@aymansayed5989]

Wow... amazing presentation, absolutely amazing, God bless you

[@TheFinanceStoryteller]

Thank you so much, Ayman! Happy to help.

[@PoGoHop360xl]

thank you so much! this def helps in studying for my final! :D

[@TheFinanceStoryteller]

Wishing you lots of success for your finals!!!!

[@PoGoHop360xl]

@@TheFinanceStoryteller Thank you!!

[@natcatyz450f]

To retain means to keep and earnings means profit. To close the years income statement, you label unused profit as retained earning to use this funds for expenses in the new year. The opposite of retained earnings is an Accumulated Deficit.

[@TheFinanceStoryteller]

Hi Natalie! I agree with most of that, but would cut out the part ".... to use this funds.... new year".

[@dooham1383]

I have a question concerning share repurchasing. When a company repurchases shares over the issuance price, why is the excess amount debited from retained earnings? (I understand that they take the amount first from contributed surplus then retained earnings). When the opposite happens (i.e. repurchase price is below the issuance), it is credited to contributed surplus and not retained earnings. Thank you!

[@TheFinanceStoryteller]

I don't know the answer to that, but if you are accounting under US GAAP, then ASC 505-30 should provide the guidance for it....

[@kimcallahan7860]

Very helpful! I have been struggling with understanding this account in my class.

[@TheFinanceStoryteller]

Thank you, Kim! Glad to hear that the video was useful for you. I have a playlist of videos on my channel that I simply named "Balance Sheet" that discusses various balance sheet accounts: kzbin.info/www/bejne/a5O6oJempreGj7c

[@kimcallahan7860]

Thank you for doing these! Your instruction is perfect. I can finally understand this!

[@TheFinanceStoryteller]

Hurray! Finance is fun. Please share with your classmates. :-)

[@funubergames2539]

Great and thorough explanation of retained earnings!

[@waldoalcantara3862]

Hello how is retained earnings connected to free cash flow?

[@TheFinanceStoryteller]

Retained earnings is commonly defined as that part of a company’s cumulative historical profits that has not been distributed to shareholders through a dividend. Free Cash Flow is that part of the total cash flow that is not required for operations or reinvestment. To calculate Free Cash Flow, you take the most comparable GAAP metric Cash From Operating Activities (or CFOA) and deduct Capital Expenditures. kzbin.info/www/bejne/nZ2WgH-qer1lhq8 Both retained earnings and free cash flow can be seen as "pockets of savings", allowing a company to reinvest money internally, pay out a dividend, etc. Retained earnings approaches it from the income statement (profitability) perspective, free cash flow approaches it from the cash flow perspective. Hope this helps!

[@osamakhan2832]

I have a question, what if retained earnings not given in income statement and you have to create retained income statement how will you write it then?

[@TheFinanceStoryteller]

Hello Osama! Retained earnings is a balance sheet account, part of the equity category. It is not found in the income statement. If you want to see how retained earnings connect between income statement and balance sheet, then this video might help: kzbin.info/www/bejne/rYvHkol7jZlkjbM Roughly speaking in a very simple setting, retained earnings is net income for the year minus dividend paid. I have never heard of a retained income statement, however something called the statement of changes in equity does exist, where retained earnings is one of the elements: kzbin.info/www/bejne/rmTFm6Vpf7WYmqc

[@pratikyadav7160]

Nice explanation because now my doubts are cleared by watching this it's CBSE SYLLABUS india which comes under business studies subject

[@TheFinanceStoryteller]

Thank you, Pratik! Happy to help.

[@MrWickedSalsa]

I work with a chart of accounts, where there is 30xxxx Accumulated results --> and this account splits into two accounts 3041xxx Retained Profit 3042xxx Retained Loss Can you please explain to me what these retained profit and retained loss accounts are? I don't understand what they are and don't know how to correctly use them in a year end closing.

[@TheFinanceStoryteller]

Hello! That's an excellent chart of accounts, as it it useful to retain the balances of historical earnings and losses separately. Here's an example of how to use them. Within the broader category of equity (shareholder capital), let's assume there are three accounts: paid in capital, retained profit, retained loss. Paid in capital is used when the company is started, let's say the shareholders contribute 100K, and the account can also be used when new rounds of equity are raised. If the company makes a loss of 20K in the first year (in the income statement), then that result is transferred to the retained loss account. Total equity is now 80 K (= 100 K minus 20K) on the balance sheet at the end of year 1. In the second year, the company makes a profit of 30K, this result goes into the retained profit account. Total equity is now 110K (= 100K minus 20K plus 30K), neatly split over three separate accounts. When the company makes a subsequent dividend payment of 10K to shareholders, this would come out of the retained profit account (bringing equity to 100K), unless there is a separate account for divided distribution. Hope this helps! My video on closing entries might be useful for the technical accounting run-through kzbin.info/www/bejne/eYnMfH-ql5ynp6s as well as the video on the relationship between income statement and balance sheet for the conceptual idea kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@weefella84]

Hey Philip - a question on this - how does the changing share price impact Stockholders Equity over time? Also, how can I calculate what share price Apple paid to buyback the shares from the example?

[@TheFinanceStoryteller]

Hey Dan! Regarding your 1st question: it doesn't, as you don't mark-to-market repurchased shares in treasury stock. On the 2nd question: let me go through my own source material tomorrow to see if I can figure that out. In the meantime, my video on "book value versus market value" might be useful for you to watch: kzbin.info/www/bejne/q3TWanSvfK6VacU as well as my video on treasury stock kzbin.info/www/bejne/oZ-qfKOEbtiMn9k Two times 5 minutes in length, I promise you it will be worth it. ;-)

[@TheFinanceStoryteller]

Regarding your second question. Information about number of shares repurchased and average price paid per share can be found in item 5 "Market for Registrant's Common Equity" of Apple's 10-K annual report filing.

[@weefella84]

@@TheFinanceStoryteller Thanks a bunch! SE & Retained Earnings can be pretty confusing that is helpful

[@Intothemarket101]

Thank you so much for sharing such useful data! Greatly appreciated

[@dolevmazker736]

interesting video, Helped me a lot. i would like to ask you - If i want to value a company for whether it can hold out a crisis(like the corona virus), then would would i look at retained earnings as a measure if a company is liquid enough for a period, or would i need to see a different measure in the financial statement. What I'm looking to see is a accounting measure or financial ratio that i can use to see if a company has enough cash to sustain a period of decline. I'm sorry if i don't make sense, i am only 5 months in my progress of learning accounting principles and valuation

[@TheFinanceStoryteller]

That's an excellent question! I don't think there is an easy answer to it. Let's start off from existential philosophy (Sartre): existence precedes essence. Translated to corporate life: a company needs to survive first before it can be valuable or build value. Survival metrics tend to be different from valuation metrics, they cover different "territories". I am fascinated by the corporate bankruptcies that are taking place in 2020. If you are bankrupt, you are bankrupt. If you are not bankrupt, you are either healthy or might be near bankruptcy. Bankrupt vs non-bankrupt is easy to detect, while healthy vs near bankruptcy is a lot harder to distinguish. I always thought that current ratio kzbin.info/www/bejne/mpzMhIqFZ7SMntE and interest coverage ratio kzbin.info/www/bejne/hmKcpappfcdqiqM were good metrics for liquidity, but when applying them this year (for example to the JC Penney bankruptcy case), it turns out that they don't always provide you the early warning you might be looking for. Overall debt-to-equity (with equity including retained earnings) is a good metric for solvency (longer term viability of a company), but it does not fully cover short term liquidity. Take a look at my videos on liquidity kzbin.info/www/bejne/jqXNhGp5m7qGqaM and the one on solvency vs liquidity kzbin.info/www/bejne/sGXdo4RpqMaAqas for more information. I realize this is a long answer without definite conclusions, but I hope it helps!

[@dolevmazker736]

@@TheFinanceStoryteller wow man, i will look at the videos you recommended to me, and i will try to establish an analysis of my own.

[@oGSniipezz12]

What about companies that have retained earning deficits that are growing but continuously pays dividends?

[@TheFinanceStoryteller]

I don't think that's a good thing, as it erodes equity at double the speed.... See my video on solvency and liquidity: kzbin.info/www/bejne/sGXdo4RpqMaAqas

[@mertyesilgoren6043]

why retained earnings doesnt appear on a/r section?

[@TheFinanceStoryteller]

Because it's part of equity. If assets grow quicker than liabilities, then equity goes up. Here's another example to take you through it: kzbin.info/www/bejne/rYvHkol7jZlkjbM

[@wayangankaranchosuyog1640]

If last year company getting loss, and next year company earn profit as (Retained earning) it is possible current year Retained earning adjusted last year loss recovered. Please tell me 🙏

[@TheFinanceStoryteller]

Yes. The sum of the historical losses would be recorded in the equity section of the balance sheet as "Accumulated deficit". Once profits are made, this "Accumulated deficit" becomes smaller, and at some point can turn into "Retained earnings".

[@Erez.Levi.Stocks]

As always an amazing video but I have a question and I would love if you could help me with it. like you said "AAPL" repurchase common stock but it not going to the "treasury" like "KO" why is that ? thanks in advance

[@TheFinanceStoryteller]

That's a very good question! Some companies repurchase stock with the intent on re-issuing approximately the same amounts (in number) of that stock under stock compensation plans. In that case, it makes sense to account for these transactions through treasury stock, see my video on that topic: kzbin.info/www/bejne/oZ-qfKOEbtiMn9k In the case of Apple, the number of repurchased shares over the past few years has been enormous, see my video on analyzing Apple Earnings Per Share to see the numbers and the effect kzbin.info/www/bejne/ioO8kKCgnMyAh7s Over fiscal years 2017 through 2019, Apple repurchased around 1 billion (!) shares, and issued 100K shares. If you repurchase shares to retire them, there's no use in accounting for them through treasury stock.

[@Erez.Levi.Stocks]

@@TheFinanceStoryteller thanks a lot for the great answer now i will see the links you send me

[@Erez.Levi.Stocks]

@@TheFinanceStoryteller I'm sorry to bother you again, I saw the videos you sent me and even though they are perfect, there is something that is still not clear to me. If a company buys shares for the treasury it means it can issue them back whenever you want as you showed on ADBE but if it is not specified in the treasury as with Apple, where does it go and can they issue them again?

[@TheFinanceStoryteller]

As far as I know, Apple retires the shares they bought back, meaning they are no longer in existence.

[@Erez.Levi.Stocks]

@@TheFinanceStoryteller have i great weekend, thanks

[@bozomonster]

Can I withdraw retained earnings in an LLC with Subchapter s selection without paying taxes since the earnings have already been taxed?

[@TheFinanceStoryteller]

In order to answer that question, I would need specific knowledge of the US corporate tax code, which I don't have. Sorry!

[@jjacob4481]

Hi is retained earning leftovers from net income that year? Love your video by the way.

[@TheFinanceStoryteller]

Hi! It's a bit broader, it includes multiple years. Retained earnings is commonly defined as that part of a company’s cumulative historical profits that has not been distributed to shareholders through a dividend.

[@53nat0r]

Thanks. Simple and fun to watch (empty pockets lol! )..I do have a silly question. So if earnings are retained should that reflect in the increase of cash in the balance sheet too?

[@TheFinanceStoryteller]

Glad you enjoyed it! :-) Yes, you understood it correctly. Retained earnings on the credit side of the balance sheet (as part of equity) need to have an opposite amount in one or more of the debit balance accounts on the assets side of the balance sheet. A good example is the balance sheets of Alphabet Inc (Google) and Facebook: kzbin.info/www/bejne/r5Kao4WQf6h_e8U

[@zakiasyed2840]

Can you please explain in accounting eqation how can i roundup percentage answer to 1 decimal place.

[@TheFinanceStoryteller]

Hello! I don't fully understand your question. In general 0.05% and higher becomes 0.1% in rounding, and 0.049% and lower becomes 0.0% in rounding.

[@kike_villa]

Great video. I only have a question. Because of these pandemic, a company with more retained earnings is in a better position for the crisis right? So I´m looking at "Hexcel" they have now $2B retained earnings and about $1B long-term debt. That means that in the case they do not make any profits during the next years, they will be able to pay their debt? I would like to know your opinion about this as I started to learn recently. Thanks, and cheers from Spain :)

[@TheFinanceStoryteller]

Hola Kike! Greetings from the Netherlands. That is a great question, to which there is no short answer, and also no definite answer. ;-) In general, I agree with your statement that "a company with more retained earnings is in a better position for the crisis". But the big follow-up question to it is: if there are retained earnings on the right-hand side of the balance sheet, then in which section of assets is the "counterbalance" on the left-hand side of the balance sheet? If the company has a lot of cash on the balance sheet, and is generating a lot of cash from operations, then they are in good position to be able to pay off debt. If the company has very little cash on the balance sheet, and the assets consist mostly of fixed assets and goodwill, then they don't have cash to pay bills or debt. Take a look at my very simple example of the relationship between income statement and balance sheet in my "chocolate shop" example. They have retained earnings after year 1, but no cash available to pay off debt, as they will have to pay suppliers and salaries first. kzbin.info/www/bejne/rYvHkol7jZlkjbM To assess a company's ability to pay off debt, the most important concept to learn is free cash flow kzbin.info/www/bejne/fHSTi4J6jKutptE in the broader context of the cash flow statement kzbin.info/www/bejne/o4ulm6Z_jtd_rK8 When I review financial statements these days, I start off by looking at current ratio on the balance sheet (current assets divided by current liabilities) kzbin.info/www/bejne/mpzMhIqFZ7SMntE to assess a company's liquidity kzbin.info/www/bejne/jqXNhGp5m7qGqaM I also look at equity as percentage of the total balance sheet. The higher the equity, the bigger the ability to absorb losses. That's where retained earnings comes in. For a lot of companies, retained earnings is a major balance within equity, see the statement of changes in equity kzbin.info/www/bejne/rmTFm6Vpf7WYmqc

[@kike_villa]

The Finance Storyteller great thanks for the answer, if I remember well, they had also CA/CL>2 so its good as well. I will check those videos 👌

[@haifaashraf1955]

additional paid up capital please?

[@TheFinanceStoryteller]

What about it? Would you like to know the definition, or are you requesting me to make a video on the topic? Please clarify.

[@haifaashraf1955]

@@TheFinanceStoryteller yes a definition and example m\, yeah a video on this topic

[@TheFinanceStoryteller]

If a company issues shares (to existing or new shareholders) at $10, while the par value or nominal value is only $1, then $9 goes into the account "additional paid-in capital".

[@haifaashraf1955]

@@TheFinanceStoryteller thank you but video could be more useful .❤️

[@magnumopus8202]

Why is retained earnings affected by stock dividends those are not cash. Please someone explain why that affects that account. Thank you.

[@TheFinanceStoryteller]

In the examples in this video I cover cash dividends issued by Verizon and Apple. Here's what I found for you specifically regarding your question on stock dividends after a quick search: on the declaration date of a large stock dividend, a journal entry is made to transfer the par value of the shares being issued from retained earnings to the paid-in capital section of stockholders' equity.

[@momenttom4969]

Op de balans van Coca Cola staan 65.8 miljard aan retained earnings, terwijl de shareholders equity 21 miljard is. Hoe moet ik dat zien? www.macrotrends.net/stocks/charts/KO/coca-cola/balance-sheet

[@TheFinanceStoryteller]

Haal je gegevens altijd op de juiste plek, dat wil zeggen rechtstreeks uit de bron (Coca-Cola 10-K annual report), dan zul je zien dat de prutsers van de Macrotrends website wel eens wat regeltjes vergeten, zoals de regel "Treasury Stock" ter waarde van ($52B). Die moet je er nog van aftrekken! Tevens missen ze de regel "Capital Surplus" van $17B.

[@momenttom4969]

@@TheFinanceStoryteller Wow, dat is best bizar! Trouwens, fijne nieuwe audio apparatuur heb je! Luistert erg aangenaam. High 🤚 Wel nog 1 vraag eigenlijk; waar haal je dan de 10-15jr gegevens vandaan? Zet je 15 10K's open?

[@TheFinanceStoryteller]

Voor de "income statement" heb je meestal 3 jaar naast elkaar in een 10-K, voor cash flow statement ook 3 jaar, maar voor de balans slechts 2. Dus voor 10-15 jaar aan "income statements" kan ik 4-5 10-K's naast elkaar zetten (2019, 2016, 2013, 2010, 2007) en er de gegevens voor alle jaren uithalen, maar voor 10-15 jaar balansgegevens heb je er 8-16 nodig (2019, 2017, 2015, etc.). Waar je ook mee op moet passen is nieuwe accounting regels waardoor historische cijfers een "restatement" ondergaan (of niet, want het is helaas niet altijd vereist). In de afgelopen jaren zie je in zowel US GAAP als IFRS de balansen flink groeien door de nieuwe leasing regels (ASC 842 / IFRS 16), en helaas wordt dit op een andere manier weergegeven tussen deze twee accounting standaarden. Zie mijn bespreking van de balans van Walmart kzbin.info/www/bejne/m3rNdJSbg9JgjM0 voor de US manier, en kijk eens naar het Shell 2019 jaarverslag voor de IFRS manier.

[@santhosh8290]

I feeel volume is quite low

[@TheFinanceStoryteller]

Then turn it up on your side, and/or switch the subtitles on.

[@samilkaraburc9544]

abi aksanın aynı türk aksanı gibi

[@TheFinanceStoryteller]

Thank you, I take that as a compliment! I am actually from the Netherlands.

[@dontblame2224]

Empty pockets that’s so funny

[@TheFinanceStoryteller]

Great to hear that! Might as well try to keep the topic "light". ;-)