What is the primary purpose of a statement of retained earnings?

The primary purpose of a statement of retained earnings is to show the changes in retained earnings over a specific period. This statement provides important insights into how much profit a company has reinvested in the business after accounting for dividends paid out to shareholders.

The statement typically begins with the retained earnings balance at the beginning of the period, then adds net income earned during the period, and subtracts any dividends distributed to shareholders, arriving at the retained earnings balance at the end of the period. This helps stakeholders understand how decisions regarding profit distribution and business reinvestment affect the company's financial health and future growth potential.

By focusing on retained earnings, the statement contributes to a clear picture of the company’s ability to sustain and grow operations, which is crucial for current and potential investors as well as management decision-making.