Question

Alibaba Group Initial Public Offering: A Case Study of
Financial Reporting Issues
Qing L. Burke
Tim V. Eaton
Miami University

Q6. Alibaba Group’s Consolidated Balance Sheets in its IPO Prospectus report that its retained earnings went from a positive balance in the year ended March 31, 2012 to a large negative balance in the year ended March 31, 2013.

a. Generally speaking, what are the factors that impact a company’s retained earnings?

b. Using the information from Alibaba Group’s Consolidated Financial Statements in its IPO Prospectus, provide possible explanations for factors that contributed to the wild ?uctuations in retained earnings and whether this should cause an investor concern

Answer 1

6) A) Company’s retained earnings are the accumulated profits that it earns over a period time. Retained earnings are the part of equity but if considerable losses are made then retained earnings do form a debit balance and found on the asset side of the balance sheet. The factors that are highly influential in impacting a company’s retained earnings are the considerable losses in the core operations of the company, declaring and paying excess dividends to shareholders with respect to its earnings and buying back of treasury stocks. In all the mentioned factors a decrease of the retained earnings is bound to occur as the outflow of funds is a certainty.

B) The financial statements in 2013 clearly indicated a negative balance of retained earnings in comparison to its figures in 2012 and that was primarily associated with the buying back of ordinary shares from the Yahoo Co. in September 2012 for a whopping amount of US$7082million for its 523 million shares.

This should not make the investors worry too much as buying back of treasury stock is a one-time phenomenon. Had the company suffered operational losses the company would have been badly hurt by its activities but with its IPO getting launched the reduction of the negative retained earnings was compensated in 2014.