Investing

Retained earnings for investment

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  • Sep 6th, 2016 11:41 pm
Jr. Member
Apr 5, 2005
138 posts
2 upvotes

Retained earnings for investment

Can anyone explain the concept of retained earnings in a corporation and use that money for investment purposes.
I understand the investments (passive) within a corporation is taxable at a high rate.

Second, if a corporation invests in another corporation (non core business), how is that represented on the balance sheet? What are the tax implications?
1 reply
Deal Fanatic
Nov 24, 2013
6479 posts
3344 upvotes
Kingston, ON
Retained earnings is basically the cumulative bucket for all the profits (less losses) a company has ever made, less dividends to shareholding individuals or companies. Assets = Liabilities + Owners' Equity. Equity also contains things like initial share capital raised, but normally the biggest chunk will be RE.

RE by itself holds no tax implications. At the end of a fiscal year, net income (after tax) gets closed out to RE. RE is thus already an after-tax number.


A business doesn't technically invest in other businesses from their retained earnings. Either they use cash, take on debt, or issue new shares to make the investment, but none of those directly alter retained earnings. They're balance sheet transactions. Retained earnings is affected later by the income statement impact of the investment. Was there investment income, what interest/fees were paid to make the investment, etc.

How an investment gets reported varies on how much of the other company the reporting company owns. Owning <10% of a publicly traded company and the business would probably just report the shares at current market value at the end of the reporting period. Own 33% or controlling interest in something, and you get into joint/consolidated financial statements.

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