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By Arthur Hindmarch

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Clearly then the net worth of the firm will increase when profits are earned over time. The firm may decide to distribute part or all of the profits earned in a period to its owners. These distributions, termed 'dividends' in the case of companies, are flows of assets from the firm to the owners, and thus the owners' equity will be correspondingly reduced. The retained profit of a period is the excess of a period's profit over distributions. Where a firm earns profits over several periods and not all are distributed the amount of retained profit for past and current periods will accumulate into the total retained profit.

On the one hand they may be concerned to see that the firm has done well in the past and that this is expected to continue so that an improvement in wages and conditions is justified. On the other hand they may be interested in collecting evidence on the effect of price increases or redundancies on firms as supporting facts for a particular union policy. The internal management will be interested in the effect of their past decisions on the value and profit of the company but they will be more concerned with obtaining the sort of information which will provide the proper basis for decisions on the future activities of the company.

4 Revenues and Expenses The following is a chronological summary of the transactions of Cotton Company during February 19X1: 1. Paid £600 in cash for inventory. 2. e. opening inventory and month's purchases. 3. Paid £80 in cash to an assistant for working during February. 31January 19X1 Transaction 1 Assets Cash Inventory Debtors £ 900 300 200 £1400 Liabilities Owed to Bank Oumers' Equity 2 At end of 28 February 19X1 3 £ £ £ -600 + 1200 -80 +600 - 900 200 £1620 900 Capital profit- revenues (note 1) - expenses (note 1) - retained (note 2) 900 £ £ 500 + 1200 1200 -900 -80 = - 980 220 720 500 £1400 Notes: £ 1420 £1620 (1) Revenues are shown as positive (+) as they are increases in profits, and expenses are shown as negative (-) because they reduce profits.

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