© 2000 John Petroff
|
|
© 2000 John Petroff |
A- Retained earnings
Internal financing, as setting aside annual profits in retained earnings is called, is obviously the safest and cheapest method of financing a company. One would imagine that all firms ought to formulate detailed targets of earnings accumulation. But for most firms that would just be wishful thinking because what earnings can be retained is merely the residual of a number of strategies. First and foremost, the earnings must be generated. This will be the subject of next chapter. In that chapter, it will be emphasized that the quality of the earnings is more important than the size, and that this quality may require adequate spending on future oriented goals. Second, what is retained is what is not distributed. As shown below, dividend distributions take precedence over any internal need for retained earnings. Third, there are numerous appropriations of retained earnings that are dictated by law or accounting logic. Thus, what is left can hardly be a target in its own right.
See review questions Q-12A.1 and Q-12A.2.
| Previous: Introduction |
|
Next 1-Appropriations |