Which of the following best describes retained earnings?

• A. The amount of dividends declared during the year.
• B. The total amount of cash held by a corporation at year-end.
• C. The value of shares issued by a corporation to its stockholders.
• D. An amount earned by a corporation and not yet distributed to stockholders.

Answer: (D)

Verified step by step guidance

1. Understand the concept of retained earnings: Retained earnings represent the cumulative amount of net income earned by a corporation that has not been distributed to stockholders as dividends. It is essentially the portion of profits kept within the company for reinvestment or to strengthen its financial position.
2. Clarify why retained earnings are not dividends: Dividends are the portion of earnings distributed to stockholders, whereas retained earnings are the portion of earnings retained by the company. Retained earnings are calculated after dividends are subtracted from net income.
3. Clarify why retained earnings are not cash: Retained earnings are not the same as cash held by the corporation. Retained earnings are an accounting measure that reflects accumulated profits, which may be reinvested in assets, operations, or other areas, rather than being held as cash.
4. Clarify why retained earnings are not related to shares issued: Shares issued represent equity raised by the corporation from stockholders, not the earnings generated by the corporation. Retained earnings are derived from the company's operations and profitability, not from issuing shares.
5. Conclude with the correct definition: Retained earnings are best described as the amount earned by a corporation and not yet distributed to stockholders, aligning with the correct answer provided in the problem.