Definition
Retained Earnings, Appropriated refers to the portion of a company’s retained earnings that is set aside for specific purposes and is not available for dividends. This appropriation can be used for various purposes, such as funding future projects, legal requirements, or any other anticipated expenditure the management deems necessary.
Examples
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Legal Reserve: If a company is required by law to maintain a certain amount of retained earnings for legal liabilities, this portion will be classified as appropriated retained earnings.
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Contingency Reserves: A company may appropriate a portion of retained earnings to cover unforeseen expenses such as lawsuits or economic downturns.
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Expansion Reserve: To finance future expansion projects, a company might set aside a portion of retained earnings so that funds will be readily available when needed.
Frequently Asked Questions
Q1: What is the difference between retained earnings and appropriated retained earnings?
A1: General retained earnings refer to the accumulated profits that a company has retained over time and can potentially be distributed as dividends. Appropriated retained earnings, however, are a portion of retained earnings that have been set aside for specific purposes and are not available for dividend distribution.
Q2: Why do companies appropriate retained earnings?
A2: Companies appropriate retained earnings to ensure that funds are available for specific future needs, to comply with legal requirements, or to manage financial risks responsibly.
Q3: Can appropriated retained earnings be used for dividends?
A3: No, appropriated retained earnings are not available for dividends as they are reserved for specific purposes. However, the board can decide to reverse the appropriation and make those earnings available again.
Q4: How is the appropriation of retained earnings reflected in financial statements?
A4: Appropriated retained earnings are typically shown in the equity section of the balance sheet under retained earnings, with a note explaining the reason for the appropriation.
Q5: Who decides on the appropriation of retained earnings?
A5: The decision to appropriate retained earnings is typically made by the company’s board of directors in line with organizational policies and strategic objectives.
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Retained Earnings: Profits that a company has earned to date, less any dividends or other distributions to shareholders.
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Dividends: A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders.
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Financial Statement: A formal record of the financial activities and position of a business, person, or other entity.
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Equity: The value of an ownership interest in the company, represented in financial statements by the owners’ funds.
Online References
Suggested Books for Further Studies
- Financial Accounting by Weygandt, Kimmel, and Kieso
- Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Fundamentals of Retained Earnings, Appropriated: Accounting Basics Quiz
### Why do companies appropriate retained earnings?
- [ ] To increase immediate cash flow.
- [x] To earmark funds for specific future needs.
- [ ] To make dividends available to shareholders.
- [ ] To increase the company's share price.
> **Explanation:** Companies appropriate retained earnings to earmark funds for specific future needs or to comply with legal requirements.
### What can appropriated retained earnings be used for?
- [x] Funding future projects.
- [ ] Immediate dividend distributions.
- [ ] Reducing debt principal.
- [ ] Paying executive salaries.
> **Explanation:** Appropriated retained earnings can be used to fund future projects, cover legal liabilities, or other specific anticipated expenditures.
### Are appropriated retained earnings available for dividend distribution?
- [ ] Yes, always.
- [ ] Only in certain cases.
- [x] No, they are reserved for specific purposes.
- [ ] Yes, unless prohibited by shareholders.
> **Explanation:** Appropriated retained earnings are not available for dividend distribution as they are set aside for specific purposes.
### Who decides on the appropriation of retained earnings?
- [ ] Shareholders through majority vote.
- [ ] The external auditors.
- [x] The board of directors.
- [ ] Chief Financial Officer (CFO).
> **Explanation:** The company's board of directors typically makes the decision to appropriate retained earnings.
### How is the appropriation of retained earnings reflected?
- [ ] In the income statement under expenses.
- [ ] In the cash flow statement under financing activities.
- [x] In the equity section of the balance sheet.
- [ ] As a note in the annual report only.
> **Explanation:** Appropriated retained earnings are shown in the equity section of the balance sheet under retained earnings, often with a note explaining the reason.
### Can the board reverse the appropriation of retained earnings?
- [x] Yes, the board can reverse the appropriation.
- [ ] No, it is fixed once appropriated.
- [ ] Only with shareholder approval.
- [ ] It can be reversed by the CFO.
> **Explanation:** The board of directors can reverse the appropriation and make those earnings available again for other uses, including dividend distribution.
### What does the term 'appropriated retained earnings' signify?
- [ ] Earnings set aside for executive bonuses.
- [ ] Funds available for immediate expenses.
- [x] Earnings set aside for specific purposes.
- [ ] Profit allocated to shareholders directly.
> **Explanation:** 'Appropriated retained earnings' signifies that a portion of retained earnings is set aside for specific purposes and not available for dividend distribution.
### How might legal requirements influence appropriated retained earnings?
- [ ] They force companies to borrow more money.
- [ ] They have no impact on retained earnings.
- [x] They may require companies to reserve a portion of earnings.
- [ ] They increase executive compensation.
> **Explanation:** Legal requirements might necessitate that companies reserve a portion of earnings for obligations like legal liabilities.
### Why might a company create a contingency reserve within appropriated retained earnings?
- [x] To cover unforeseen expenses such as lawsuits.
- [ ] To immediately raise the stock price.
- [ ] For executive bonuses during the fiscal year.
- [ ] For purchasing inventory.
> **Explanation:** A contingency reserve within appropriated retained earnings is created to cover unforeseen expenses such as lawsuits or economic downturns.
### Where can you find information on appropriated retained earnings in financial statements?
- [ ] In the income statement under profits.
- [x] In the equity section of the balance sheet.
- [ ] In the liabilities section of the balance sheet.
- [ ] In the footnotes to the statement of cash flows.
> **Explanation:** Appropriated retained earnings are typically shown in the equity section of the balance sheet under retained earnings, with a note describing the nature and purpose of the appropriation.
Thank you for exploring the detailed concept of retained earnings, appropriated, and for challenging yourself with our quiz! Continue enhancing your accounting knowledge ambitiously!
