Practice question · Multiple choice
Retained earnings sit at 4 million and the bank account holds 200,000. Where did the rest go?
Hints
- Retained earnings sit on the right side of the balance sheet. Ask what the left side shows.
- Profit kept in the business had to be used for something. What?
Show the answer
B. Into other assets: inventory, equipment, receivables
Why
Retained earnings are a claim figure on the financing side, and the assets side records what the money was turned into, a factory, mostly. Reading it as a cash reserve is the classic misinterpretation, and it is why a profitable firm can have a large retained-earnings balance and no ability to pay a dividend.
Practise Liabilities and Equity
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