What is the term for profit that is retained by firms to finance their future investments?

• A. Retained profits
• B. Dividends
• C. Earnings
• D. Revenue

Answer: (A)

The correct term for profit that is retained by firms to finance their future investments is retained profits. Retained profits represent the portion of the net income that is not distributed to shareholders as dividends but instead is reinvested back into the business to support growth, expansion, or other strategic initiatives. This investment can be critical for a firm's long-term sustainability and development, allowing companies to fund new projects, enhance infrastructure, or increase operational capacity without requiring external financing.

Dividends, on the other hand, are payments made to shareholders from a company’s profits, and hence do not contribute to the retention of profits for investment. Earnings and revenue also have different meanings; earnings refer to the total profit after all expenses have been deducted from revenue, while revenue represents the total amount of money generated from sales before any costs are taken into account. Therefore, retained profits is the most accurate term in the context of financing future investments.