Q1. What is retained earning? What are its features?
Q2. A company saves certain amount of earnings for future use. Give advantages to must have retained earnings.
Answers
Answer:
1
Explanation:
Retained earning is a type of earning which is kept aside out of profit after payment of dividend and taxes.It is also known as ploughing back of profit.
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Ans-2
advantage-
It is more dependable then external source of finance.
There is no fixed commitment to pay dividend or interest as these profits are company's own profit.
Answer:
Retained earning refers to the undistributed profit after payment of dividend and taxes.
Features of retained earnings are:
1. Cost of Financing:
It is the general belief that retained earnings have no cost to the company.
2. Floatation Cost:
Unlike other sources of financing, the use of retained earnings helps avoid issue- related costs.
3. Control:
Use of retained earnings avoids the possibility of change/dilution of the control of existing shareholders that results from issue of new issues.
4. Legal Formalities:
Use of retained earnings does not require compliance of any legal formalities. It just requires a resolution to be passed in the annual general meeting of the company.
Advantages of retained earnings:
The advantages or benefits of retained earnings may be stated as under:
i. Cheaper Source of Financing:
The use of retained earnings does not involve any acquisition cost. The company has no obligation to pay anything in respect of retained earnings.
ii. Financial Stability:
Retained earnings strengthen the financial position of a business and thereby give financial stability to the business.
iii. Stable Dividend:
Shareholders may get stable dividend even if the company does not earn enough profit.
iv. Market Value:
Retained earnings strengthen the financial position of a company and appreciate the capital which ultimately increases the market value of shares.
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