Surplus not distributed (retained earnings) could contribute to

April 15, 2024 by rawan239

also be used to increase the company’s cash reserves, which can provide a cushion against unexpected expenses or losses.

Financial soundness is a measure of a company’s ability to meet its financial obligations. A company with a strong financial position is able to pay its bills on time, has a healthy cash flow, and has a low level of debt. Retained earnings can contribute to a company’s financial soundness by providing a cushion against unexpected expenses or losses.

Option A is incorrect because retained earnings can actually help to prevent financial disaster. By providing a cushion against unexpected expenses or losses, retained earnings can help to keep a company afloat during difficult times.

Option C is incorrect because retained earnings are not necessarily a bad thing. In fact, they can be a sign of a healthy company. A company that is able to generate strong profits and retain those profits is likely to be a financially sound company.

Option D is incorrect because retained earnings are not liabilities. Liabilities are debts that a company owes. Retained earnings are not debts; they are simply the accumulated net income of a company that has not been distributed to shareholders as dividends.