The fact that the company reports large earnings does not mean that it has a large amount of cash on hand. Cash generated from earnings may have been invested in new plant and equipment, or in paying off debts, or in acquiring larger inventors. There is no necessary relationship between the balances the Retain Earnings account and the balance in the Cash amount. The traditional expression of “paying dividends out of retained earnings” is misleading. Cash dividends can be paid only “out of “cash.
