Retained earnings
Profits kept in the business rather than paid out. Where net income lands on the balance sheet, which is what ties the statements together.
Where you will meet it
Retained earnings appears in 8 learning outcomes on the CFA syllabus. A few of them:
- Explain how the three financial statements connect to one another
“Net income from the income statement flows into retained earnings on the balance sheet and is the starting point of the indirect cash flow statement.”
- Derive justified leading and trailing P/Es from the Gordon growth model and explain what they mean
“A higher payout, a lower required return or higher growth each raises the justified multiple, but payout and growth are linked because growth is funded by retained earnings, so raising the payout lowers growth unless return on equity changes.”
- Work out translation effects and assess how the income statement and balance sheet of a subsidiary are restated in the parent's presentation currency
“Under the temporal method only net monetary items are exposed; the remeasurement gain or loss is the balancing figure that reconciles retained earnings, and it passes through net income.”
- Weigh the pros and cons of holding real estate via listed securities rather than private vehicles
“Against that, share prices move with the stock market and look far more volatile than appraised values, investors cannot control property decisions, a listed structure has its own costs, REITs cannot pass tax losses through to shareholders, distribution rules limit retained earnings so growth needs fresh capital, and structures such as UPREITs can create conflicts of interest.”
Practise it
Practise retained earnings until it is automatic: questions that explain every wrong option.
Take the free diagnostic →