The Daily Technical #05

Good morning. Welcome to the fifth edition of The Daily Technical. You’re here for one reason so let’s dive in.

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OVERVIEW OF FRIDAY’S QUESTION
How do you calculate retained earnings for the current period?

When calculating retained earnings for the current period, start by understanding what retained earnings represent: the company’s accumulated net income, minus any dividends paid to shareholders. To calculate it, follow this formula:

Current Period Retained Earnings = Prior Retained Earnings + Net Income - Dividends

It’s helpful to break it down: first, take the retained earnings from the previous period, add the net income for the current period (which is found on the income statement), and subtract any dividends that were paid out during the period. That gives you the retained earnings for the current period.

For example, if a company had $100,000 in prior retained earnings, earned $20,000 in net income, and paid $5,000 in dividends, its current retained earnings would be $115,000.

Common Mistakes:

1. Forgetting to subtract dividends 
   Some people overlook dividends, which can lead to an overestimate of retained earnings. Dividends paid to shareholders reduce the amount of retained earnings the company keeps.

2. Using the wrong net income 
   Be sure to use net income from the current period, not prior periods. Only the income from the current period should be added to the previous retained earnings balance.

3. Confusing retained earnings with cash 
   Retained earnings aren’t the same as cash in hand. Retained earnings represent profits the company has held onto, but that doesn’t necessarily mean they’re sitting in cash—it could be reinvested in the business.

TL;DR:

• Retained earnings = Prior Retained Earnings + Net Income - Dividends.

• Don’t forget to subtract dividends from net income.

• Retained earnings are profits kept by the company, not necessarily cash.

TODAY’S QUESTION
What is the difference between the 10-K and 10-Q?

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