Bosco Company’s retained earnings balance was $20 million and $25 million on December 31, 2003 and 2004, respectively. During 2004, the company paid dividends of $1 million to its stockholders. Assuming no other transactions affected retained earnings, Bosco’s net income for 2004 was: A) $6 million. B) Cannot be determined from the information provided. C) $5 million. D) $4 million. The correct answer was A) $6 million. Could someone please enlighten me on the relationship between retained earnings and net income? Thanks.
Net income(I/S) - Dividends = Retained earnings(B/S)
Income increases RE while Dividend decrease RE. Increases in Retained earnings is the effect of Earnings and Dividends. Beginning RE : 20 +RE :? -Dividends :1 =Ending RE :25
RE is the level of water in the bathtub. Each period, NI flows into the bathtub; dividends flow out. > Net income(I/S) - Dividends = Retained earnings(B/S) …should read “_change in_ Retained Earnings”.
Net Income can be used to pay dividents and reinvestment in the company operations. Reinvestment portion is called retained earnings.
Increase in Retained Earnings account (from 2003 to 2004) + Dividends (2004) = Net Income (2004) ($25m - $20m) + 1m = $6m - Dinesh S