(a). Is the company financially sound? (b). Can the retained earnings be converted into capital?

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.

(a). Is the company financially sound?

(b). Can the retained earnings be converted into capital?

(c). What type of source retained earning is?

Answer 1

(a) The company is financially sound as it has double the amount as reserves or retained earnings or kept aside profits.

(b) Yes, the retained earnings can be converted into capital by means of capitalisation of reserves.

(c) Retained earning is self-financing or an internal source of finance.