22. A company which has been trading for 4 years has made £10,000 in the last financial year and pays £8,000 in dividends.
The Statement of Financial Position shows the following:

What is the meaning of “Retained Earnings”?

A. It is the £8,000 that is paid as dividends

B. It is the difference between the revaluation reserve and the shares

C. It is a pot of £8,000 cash that the company can use for finance

D. It is the profits made over the life of the company that were not paid out as dividends

Answer : D

Do not fall into the trap of thinking that the “retained Earnings” are a pot of cash. They could be many years old – and have been re-invested into the business, perhaps to finance assets, etc.