The 2009 annual report of Kirtland Products disclosed net earnings of approximately $87 million for the fiscal year ending March 31, 2009, and retained earnings of approximately $485 million as of March 31, 2009. Explain why Kirtland reports $87 million as net earnings, but a much larger amount, $485 million, as retained earnings.
Net Income versus Retained Earnings
Net income differs from Retained Earnings in that net income represents the earnings for a particular accounting period. Retained Earnings is the cumulative amount of net income for all accounting periods back to the beginning of the business, less dividends declared.
Answer and Explanation:
The net income of $87 million represents only the income for fiscal year 2009. The Retained Earnings balance of $485 million includes the $87 million from 2009 plus all net income from prior years less any dividends declared. At the end of each fiscal year, net income for the year is swept into Retained Earnings and the income and expense accounts are reset to zero. Therefore, the Retained Earnings account grows each year.
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from OSAT Business Education (CEOE) (040): Practice & Study GuideChapter 69 / Lesson 5