Question

Explain any three demerits of retained earnings.

Answer 1

The demerits of retained earnings are as follows:

1. Possibility of manipulation: The stock exchange’s share price can be controlled by reinvesting profits. Investors may fall victim to scams and fraud.
2. Unstable source of finance: When funding an organization, retained earnings are not a reliable source of finance because income can fluctuate from year to year.
3. Wastage of resources: Retained profits are a waste of valuable resources if they are allowed to build up over an extended period of time without being used wisely or constructively.