Question

Retained earnings represent cash that is available to a company for future operations and expansion.

true or false

Answer 1

Retained earnings represent the portion of net income or net profit on a company's income statement that are not paid out as dividends. Rather, these earnings are retained in the company. Retained earnings are often reinvested in the company to use for research and development, future expension, replace equipment, or pay off debt.

It is important to understand that retained earningsdo not represent surplus cash or cash left over after the payment of dividends. Rather, retained earnings demonstrate what a company did with its profits; they are the amount of profit the company has reinvested in the business since its inception.

Hence it does not necessary that we have retained earnings in the form of cash. It may be in the form of investments from surplus or savings.

So the statement that retained earnings represent cash is not correct.