If a firm began the year showing $10 million as retained ea…

If a firm began the year showing million as retained earnings on its balance sheet, had $2 million of net income for the year, and paid $3 million in dividends, what would be the amount of its retained earnings at the end of the year? Purchase the answer to view it

 

Answered

Calculating the amount of retained earnings at the end of a year requires the consideration of net income, dividends, and the beginning balance of retained earnings. Retained earnings represent the accumulated profits of a company that have not been distributed to shareholders as dividends. It indicates the portion of net income that the company has chosen to retain and reinvest in the business.

To determine the ending balance of retained earnings, we must subtract dividends paid from the beginning balance of retained earnings and then add the net income for the year. In this case, the beginning balance of retained earnings is $10 million, the net income is $2 million, and dividends paid amount to $3 million.

Using the formula:

Ending Retained Earnings = Beginning Retained Earnings + Net Income – Dividends

we can calculate the ending balance of retained earnings as follows:

Ending Retained Earnings = $10 million + $2 million – $3 million
Ending Retained Earnings = $9 million

Therefore, the amount of retained earnings at the end of the year would be $9 million.

This calculation demonstrates how retained earnings are affected by net income and dividends, and how they contribute to the overall financial position of a company. Retained earnings are an important indicator of a company’s ability to generate profits and reinvest in its operations.

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