Retained earnings is a balance that sits on the balance sheet But it's actually made up of a number of figures which can be found elsewhere. We start with net income Net income is what goes into retained earnings (retained earnings is your reinvested profits, your reinvested net income) This increases retained earnings and it comes from the income statement However, that net income can be reduced by dividends. This is profit that's paid out (that's not reinvested) This decreases retained earnings And again, we'll often find this at the bottom of the income statement And preference dividends, preference dividends can be accounted for as interest or as dividends If they're interest, then they've already affected the net income, so it'll go through the net income line If it's counted as a dividends, then again it will reduce retained earnings It changes "BASE" analysis and that's how we're going to bring all of these together, "BASE" analysis So the B stands for beginning, we're going to start with beginning retained earnings and get down to the E The E is ending retained earnings and we're looking in this exercise to forecast our ending retained earnings So I start with beginning retained earnings and I ask, what can I add onto that? We add net income Net income is your reinvested profit, makes your retained earnings go up I then ask, well what could I subtract? What would make my retained earrings go down? And the first one is your common dividends, profits not reinvested Profits not put into retained earnings, they're paid out to shareholders What else could I subtract? Well I could subtract preference dividends if classed as dividends Now if they were classed as interest, they've already gone into net income The net income already is post preference dividends if they're classed as interest So I would not put them through here a second time in the S or subtraction line If I put all of that together, take the beginning figure, add, subtract, subtract, we get to our ending retained earnings And thus we have forecasted the ending retained earnings figure