Question

A company had a beginning balance in retained earnings of $45,000. It had net income of $8,000 and paid out cash dividends of $6,125 in the current period. The ending balance in retained earnings equals ______.

Answer 1

The correct answer is: $46,875.

Step-by-step explanation:

Retained Earnings are the portion of the company's net earnings that it does not payout to shareholders as dividends. The company keeps this money, reinvest it in the business, or uses it to pay out a portion of its debt. To see how much of its earnings a company has retained look at the Balance Sheet under shareholder's equity. Retained earnings are calculated using the following formula:

RE = BP + Net Income (or Loss) − C − S

Where:

RE = Retained Earnings

BP= Beginning Period RE

C = Cash dividends

S = Stock dividends

Then, in the example:

RE = $45,000 + $ 8,000 - $6,125

RE = $46,875