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Date Posted: 05:04:20 09/11/01 Tue
Author: Pete DaDalt
Subject: Re: Cash flow from financing - How to handle Retained Earnings
In reply to: Student 's message, "Cash flow from financing" on 12:38:03 09/09/01 Sun

Since you haven't given a specific question, let me give you a GENERAL approach to handling Retained Earnings. First, let me jump to the end - you don't include Retained Earnings on the Statement of Cash flow. However, you do use it to get other things. Now for the details and explanations:

First, remember that the change in retained earnings (the CHANGE, not the LEVEL) results from two factors: RE is increased by Net Income and Decreased by Dividends. Another way to look at this is as follows: each year Net Income is "exhausted" into two areas - it either increases Retained Earnings or is paid out as a dividend.

Regardless of which way you remember it, use the follwing identity:

Net Income = Dividends + (change in Retained Earnings).

The Net Income is entered as an Operating Cash Flow (positive if the firm is profitable, negative if it's a loss). The Dividend goes into Financing Cash Flow (an outflow).

Since you have already accounted for the component parts of Retained Earnings, you do NOT include RE anywhere on the statement..



>I am having trouble calculating the cash flow from
>financing activity. I am not sure what to include and
>what I need to do with Retained Earnings.
>Any help would be great.

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