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Unappropriated Retained Earnings | How to Calculate? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
WallStreetmojo watch the video
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clicking the bela ican today we have a
topic with us as unappropriated retained
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earnings well this is a part of the
shareholders equity we always refer to
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and operate through the retained earnings
whenever we talk about it retained earnings
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shareholders equity always come into
pictures let's try and understand first
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and the foremost thing what is URE
since simple terms the ure that is
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Unappropriated retained earnings
is that part is that part of the net
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income earned by the firm that does not
have a specific use outlined in the
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current frame of time now the management
might have an idea of how they want to
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use it they might like to work on all
scenarios and similar feature cash flows
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before executing this idea so if it
works out then it's really good but it
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does not then the management is legally
bound to disclose or implement the idea
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in any case all part of the money that
can be distributed to these shareholders
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dividend now the next thing that I want
to discuss is how does the URE Worked
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how exactly this works
well considering the IT consulting firm
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photon a has let's say $ 5,000,000 of reporting revenues and
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eventually you know let's say 1 million
in retained earnings
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in retained earnings re so not all the
amount is automatically going to be
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offered for the payment to the
shareholders in the form of dividends
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the Board of Director believe that you
know it will be in the best interest of
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the firm to expand hence decide to keep
let's say $ 600,000 to reinvest to
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reinvest their money and to be called as
appropriated retain earnings since there
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is there are no such plans for $ 400,000
that is $ 400,000 as of now this
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will be calculated as the unappropriated
RE URE right the whole part of the
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amount can be distributed to the
shareholders as dividend considering the
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following you know table that I'm going
to prepare for you
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it's a $ 5,000,000 then we have expenses
that goes in right $ 4,000,000 the net
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retained income is as simple as that just
deduct both of this above and from that
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the appropriated retained earnings is
how much $ 600,000 so when you reduct
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just did not want from here so it will
be $ 400,000 though this is used
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let's say for the purchase of land and
this can be distributed as dividends or
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dividend payment right now now I will
take you to why the unappropriated
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retain earnings are important for the
investors see unappropriated retained
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earnings are the profits what what is it
it's called the profits they are the
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profits that have not been spent nor
there is a plan to do so since they are
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not directed towards these specific
purpose by the ports so they are
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available to be paid as the dividends
right the appearance dividends so in fact
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unappropriated retain earnings helps to
determine the maximum dividend and that
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can be paid out to these shareholders so
the greater the URE the higher okay
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the dividend that can be possibly be
rewarded and mathematically it can be
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expressed as dividend is equal to
maximum of what maximum of URE 0
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so this earning are distributed among
all the outstanding shareholders or
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shareholders of the company and paid out
as dividends for the predetermined
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dividend payment schedule now I'll take
you the third part why URE exactly
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matters see there are changes in the level
of the URE and it can send a signal
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it can sell a signal to the investor
about the future plans of the company so
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an increase in the value for example
could mean that you know the company is
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planning to invest
in business in the near future so though
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this releases the cash that could be
paid out of the shoulder this might not
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be the best course of action if the
sector is in which the company operates
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demands better machinery equipment and
talent or other assets in order to
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remain competitive so in simple terms
the company has what we call as run out
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of the ideas and that can help it grow
both organically and in organic growth
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and looks up a cap in such a scenario no
the company might not be able to deliver
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the healthy growth rate right and that
is was delivering till yet so this would
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eventually affect the return on equity
the roe the share price as an investor
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would like to withdraw the investment
and pocket and the company that can offer
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better growth now there are some
exception part that I will I wish to
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discuss see it can be distrained
especially when the firm has both the
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preferred stock and the common stock for
stock and the common stocks like for
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example the preferred stock can have the
priority over the holder of the common
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stocks in this case the payment of the
dividend from the unappropriated
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retained earnings is say to be
restricted it is called as restricted
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now speaking practically all the
balances in the account of the retained
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earning belongs to the owners and until
they are paid out for the purpose in the
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event of the company insolvency or
bankruptcy both you would be used to pay
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off the creditors with any remaining amount
dissipated to the owners now what are
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the accounting implication see the you
URE reported in the owner's equity
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okay the section owners equity section
of the balance sheet so these are
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regulated via the generally accepted
accounting principles gaap okay for
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example if the firm subsidiary issues is
dividend after the parent company have
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insured financial statements then the
subsidiary company should disclose via the
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formal document like you know pro forma
trial balance or performa financial
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second you know it only specifies the
earning but does not specify these
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circumstances in which they were earned
in accordance with the gap companies
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should specify the concerned information
related to the earning part the earnings
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in the form of the notes or the
corporate documents like for example if
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they have reduced due to the change in
the accounting method such should be
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duly be disclosed in the financials so
based on this let me make my conclusions
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see financial statement they both are
explicitly and implicitly say a lot
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about the company the URE okay
form an important section and the
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statements as they express a lot about
the management it grow its its growth
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strategy and the firms growth prospect
if evaluated properly this can be an
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important for the investor before they
park their money in the firm so that's
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it for this particular topic if you have
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