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You are a consultant for several emerging, high-growth technology firms that were started locally and have been a part of a business incubator in your
You are a consultant for several emerging, high-growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you are asked is about stockholders equity. Explain the characteristics and functions of the retained earnings account and how the account is different from contributed capital.
a. | Contributed capital has been provided directly by the owners; retained earnings has been generated through operations. |
b. | Contributed capital can be returned to owners by way of dividends; retained earnings are permanent. |
c. | Profits increase retained earnings while losses decrease contributed capital. |
d. | Contributed capital represents the par or stated values of issued and outstanding shares; any additional amounts contributed by owners are included in retained earnings. |
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