What are retained earnings?

Retained earnings represent the cumulative amount of profits that a company has reinvested back into the business after distributing dividends to shareholders. This figure is crucial as it reflects the company's ability to generate profits over time and retain those profits for various purposes, such as funding growth, paying down debt, or reinvesting in operations. By keeping profits within the company rather than paying them out as dividends, firms can use these funds to support long-term strategies, such as expanding operations or acquiring new assets.

The other options do not accurately encapsulate the definition of retained earnings. For instance, the distribution of funds to shareholders pertains to dividends, which directly contrasts with the concept of retained earnings. Investment in new assets refers to the use of capital for specific purchases or projects, rather than the broader category of accumulated profits. Allocating funds for future investments does not specifically denote the historical profits kept in the business, which is the essence of retained earnings. Therefore, the definition focusing on cumulative profits retained after dividends is the most accurate representation.