by the revenues coming into the business exceeded the assets used in generating the
revenues. The objective of most businesses is to maximize net income or profit. A net
loss means that the business decreased its net assets through its operations. While a
business might survive in the short run by reporting net losses, in the long run a busi-
ness must report net income to survive.
During 2004, Hershey Foods earned net income of almost $600 million dollars. Is this
good or bad? Certainly, net income is better than a net loss. However, the stakeholders
must assess the economic performance of the corporation according to their own stan-
dards. For example, a creditor might be satisfied that the net income is sufficient to as-
sure that it will be repaid. On the other hand, a stockholder might not be satisfied if the
corporation’s profitability is less than its competitors’ profitability. Throughout this text,
we describe various methods of assessing corporate performance.Retained Earnings Statement
The retained earnings statement reports changes in financial condition due to changes
in retained earnings during a period. Retained earningsis the portion of a corpora-
tion’s net income that is retained in the business. A corporation may retain all of its
net income for use in expanding operations, or it may pay a portion or all of its net in-
come to stockholders as dividends. For example, high-growth companies like Google
Inc.andSirius Satellite Radiodo not distribute dividends to stockholders; instead,
they retain profits for future expansion. In contrast, more mature corporations like
Coca-ColaorGeneral Electricroutinely pay their stockholders a regular dividend.
Thus, investors such as retirees who desire the comfort of a routine dividend payment
might invest in Coca-Cola or General Electric. In contrast, younger and more aggres-
sive growth-oriented investors might invest in Google or Sirius.
Since retained earnings depend upon net income, the time period covered by the
retained earnings statement is the same period as the income statement. Thus, the
retained earnings statement for Hershey Foods Corporationshown in Exhibit 5 is for
the year ended December 31, 2004.
You should note that dividends are reported in Hershey’s retained earnings state-
ment rather than in the income statement. This is because dividends are not an ex-
pense, but are a distribution of net income to stockholders. During 2004, Hershey
distributed (declared) dividends of $386 million and retained $205 million of its net in-
come in the business. Thus, Hershey’s retained earnings increased from $3,264 million
to $3,469 million during 2004.Balance Sheet
The balance sheet reports the financial condition as of a point in time. This is in con-
trast to the income statement, the retained earnings statement, and the statement of cash
flows that report changes in financial condition. The financial condition of a business as16 Chapter 1 The Role of Accounting in Business
Q.Apple Computer
Corporation’sretained
earnings were$2,670 mil-
lion and $2,394 million
as of September 26, 2004
and 2003, respectively. If
Apple earned a net in-
come of $276 million dur-
ing 2004, did Apple pay
any dividends during
2004?A.No. The increase in
retained earnings of $276
million is due entirely to
the net income of $276
million.Exhibit 5
Retained Earnings
Statement: Hershey
Foods CorporationHershey Foods Corporation
Retained Earnings Statement
For the Year Ended December 31, 2004 (in millions)Retained earnings, January 1, 2004 $3,264
Add net income $591
Less dividends 386
Increase in retained earnings 205
Retained earnings, December 31, 2004 $3,469Q.For 2004, General
Motorsreported net sales
of $193,517 million and
net income of $2,805 mil-
lion. What were General
Motors’ total expenses for
2004?A.$190,712 million
($193,517 million
$2,805 million)