BPA Personal Financial Management Practice Test

The portion of earnings paid to stockholders of a corporation is known as dividends. Dividends represent a distribution of a company's profits to its shareholders, typically in the form of cash or additional shares. When a company generates income, it may choose to reinvest some of that income back into the business for growth and development, while distributing a portion to shareholders as a return on their investment.

This practice is a significant way for companies to provide value to their investors, and the decision to pay dividends is made by the corporation's board of directors, based on various factors, including the company's profitability, cash flow, and long-term business strategy.

In contrast, retained earnings refer to the portion of net income that is retained by the company and not distributed to shareholders. Net income is the total profit of the company after all expenses are deducted, and capital stock represents the equity portion that shareholders own in the company. Understanding these distinctions is crucial for making informed investment and financial decisions.