4) What is retained earnings? 5) What is capitalisation of interest ?

Question

Accepted Answer

Retained earnings are the portion of a company's profits that are kept by the company instead of being distributed as dividends.

Retained earnings are a measure of a company's financial health and its ability to reinvest in itself.
They are calculated by subtracting dividends paid to shareholders from the company's net income.
Retained earnings can be used for various purposes such as research and development, debt reduction, or expansion.
If a company has negative retained earnings, it means it has accumulated losses over time.
Retained earnings are reported on the balance sheet under shareholder's equity.

Accepted Answer

1. **Retained Earnings:**
   Retained earnings represent the cumulative net earnings or profits of a company that have been retained within the business rather than distributed as dividends to shareholders. It's the portion of net income that is kept for reinvestment in the company, paying off debts, or other uses determined by the management. Retained earnings are reported on the balance sheet under shareholders' equity and play a crucial role in assessing a company's financial health and its ability to reinvest in its operations.

2. **Capitalization of Interest:**
   Capitalization of interest occurs when a company chooses to include the interest expense related to borrowing in the cost of acquiring or constructing a long-term asset. Instead of immediately recognizing the interest as an expense on the income statement, the company capitalizes it by adding it to the cost of the asset. This practice is often applied to large projects that take a significant amount of time to complete. Capitalizing interest increases the total cost of the asset on the balance sheet and can impact financial ratios and the overall financial position of the company.

Accepted Answer

Retained Earnings (RE) are the accumulated portion of a business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment back into the business. Normally, these funds are used for working capital and fixed asset purchases (capital expenditures) or allotted for paying off debt obligations.

Capitalization is the addition of unpaid interest to the principal balance of your loan. The principal balance of a loan increases when payments are postponed during periods of deferment or forbearance and unpaid interest is capitalized.

4) What is retained earnings? 5) What is capitalisation of interest ?

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