Fine Breads Inc. paid out $26,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior year’s retained earnings were $145,000. What was the firm's 2005 net income?
Answer is $31,000
$150,000 + $26,000 = $176,000
$176,000 - $145,000 = $31,000
To find the firm's 2005 net income, we need to consider the change in retained earnings.
The formula to calculate the change in retained earnings is:
Change in Retained Earnings = Ending Retained Earnings - Beginning Retained Earnings + Dividends
In this case, the beginning retained earnings are given as $145,000, the ending retained earnings are given as $150,000, and the dividends paid out are given as $26,000.
Let's now substitute these values into the formula:
Change in Retained Earnings = $150,000 - $145,000 + $26,000
Change in Retained Earnings = $31,000
Since the change in retained earnings represents the net income for the year, we can conclude that the firm's 2005 net income was $31,000.