In BASE analysis for retained earnings, what does 'Subtract Divs Paid' represent?

In BASE analysis for retained earnings, what does 'Subtract Divs Paid' represent?

• A. Increase in retained earnings due to dividends.
• B. Decrease in retained earnings due to dividends.
• C. Capital contributions.
• D. Depreciation.

Answer: (B)

Subtract Divs Paid captures the reduction in retained earnings from the distribution of profits to shareholders. In BASE analysis, retained earnings flow as Beginning RE plus Additions (primarily net income) minus Subtractions (dividends paid and other reductions) to arrive at Ending RE. Dividends paid reduce the amount kept in the business, so this line lowers retained earnings rather than increasing them. Depreciation affects net income (and thus Additions to RE), not this subtraction. Capital contributions affect equity but aren’t a subtraction from retained earnings. So this term specifically represents a decrease in retained earnings due to the payout of dividends.

Subtract Divs Paid captures the reduction in retained earnings from the distribution of profits to shareholders. In BASE analysis, retained earnings flow as Beginning RE plus Additions (primarily net income) minus Subtractions (dividends paid and other reductions) to arrive at Ending RE. Dividends paid reduce the amount kept in the business, so this line lowers retained earnings rather than increasing them. Depreciation affects net income (and thus Additions to RE), not this subtraction. Capital contributions affect equity but aren’t a subtraction from retained earnings. So this term specifically represents a decrease in retained earnings due to the payout of dividends.