Question

Study the following case/situation and express your opinion.

The Balance-sheet of a Donald Company for the year 2018-19 reveals equity share capital of Rs. 25,00,000 and retained earnings of Rs. 50,00,000.

1. Is the company financially sound?
2. Can the retained earnings be converted into capital?
3. What type of source retained earning is?

Answer 1

1. Yes. Since the company has a sufficient amount of capital (equity share capital of ₹ 25,00,000 and retained earnings of ₹ 50,00,000), it can be called financially sound.
2. Yes, the retained earnings are converted into capital. The retained earnings cannot be an initial source of capital but they can be an important source when the company runs its business profitably. The management can convert such earnings into permanent share capital by issuing bonus shares.
3. Retained earnings are an internal source of finance or a form of owned capital.