What Is an Increase in Retained Earnings in a Cash Flow Statement?

by Marquis Codjia

An increase in retained earnings doesn't make it into a statement of cash flows. It goes into a statement of changes in shareholders' equity, also known as an equity report or statement of retained earnings. However, accumulated profits -- an interchangeable term for retained earnings -- often interrelate with a statement of cash flows.

Retained Earnings

When the economy is in tatters and businesses scramble to find fresh capital, retained earnings often set organizations with rosy prospects apart from entities that ultimately could cope with bankruptcy tedium. In clear, retained earnings -- as a cash reserve or income pile -- help a business weather the malaise of a bad economy or a slump in domestic or global demand. When financial analysts talk about retained income, accumulated profits or undistributed revenue, they mean retained earnings. This item goes into an equity report and increases a company's net worth.

Cash Flow Statement

A cash flow statement provides insight into a company's operating, investing and financing activities. If a company's leaders want to strike a deal with financiers to prevent a cash crunch, they might show investors a pastiche of accounting data summaries -- a prominent part of which is a cash flow statement. This report shows financiers that the business has competitive potential and still has a healthier liquidity prognosis even though it's temporarily facing financial distress. In an accounting glossary, "liquidity prognosis" means whether a company or individual will have enough money to meet short-term debts, operate efficiently and stay in business.


Although undistributed profits don't interrelate with a cash flow statement, both concepts may be part of an organization's strategic direction. Retained earnings constitute money a business can use to elevate its competitive stature, and that monetary implication makes retained earnings close to a statement of cash flows. Decoded, that means a company's may spend its undistributed profits on operating, investing and financing initiatives, a trifecta that's the fulcrum of a liquidity report.

Exploring the Past

Companies often dig into the past to understand what went wrong, to figure out what succeeded and why it did, to adapt sales tactics to changing market conditions and to expand market share by the day. By delving into the operational past, senior executives and department heads take tangible steps to increase sales and manage cash adeptly, both of which positively affect retained earnings and corporate monetary movements. For example, top management could pore over the financial data of a past project, identify factors that cost the company money and implement sound policies to prevent future operating losses resulting from the same risks.

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