Final answer:
Retained earnings refer to the part of a company's profits that are not distributed as dividends to shareholders but are kept within the company for other uses. The statement that retained earnings represent dividends declared but not paid is false.
Step-by-step explanation:
Retained earnings do not represent dividends that have been declared but not yet paid to shareholders. This statement is false. Retained earnings are actually part of a company's profits that are kept within the company instead of being paid out to shareholders as dividends. These earnings are reinvested into the company for various purposes such as expansion, research and development, or paying off debt.
When a company earns a profit and after it has paid taxes on those profits, it has a choice to either distribute a portion of these profits as dividends to its shareholders or to retain them. The money that is retained is hence known as 'retained earnings' and is recorded under shareholders’ equity on the balance sheet. Retained earnings increase when the company makes a profit and decrease when a dividend is paid out or when the company incurs a loss.