Which of the following describes retained earnings?

Retained earnings refer specifically to the profits that a corporation chooses to keep instead of distributing them as dividends to shareholders. This measure indicates how much of the company's net income is reinvested in the business, which can be used for a variety of purposes such as funding expansion, paying down debt, or increasing reserves for future needs.

The retention of earnings is significant for a company’s growth potential, as it reflects management's decision to reinvest earnings back into the organization rather than returning that capital to investors. This reinvestment can lead to increased future profits, which can enhance shareholder value over time.

While the other options present concepts that are related to financial activities, they do not accurately define retained earnings. Initial contributions from shareholders refer to the equity capital raised when the company is formed, losses incurred by the company involve expenses exceeding income rather than retained earnings, and cash reserves for future investments are more about liquidity management rather than the accumulated profits retained. Therefore, the definition provided in the correct answer establishes retained earnings as a crucial aspect of a company's financial strategy.