Question

Shelton, Inc. has sales of $435,000, costs of $216,000, depreciation expense of $40,000, interest expense of $21,000, and a tax rate of 35 percent. What is the net income for the firm? Suppose the company paid out #30,000 in cash dividends. What is the addition to retained earnings?

Answer 1

Answer:

a. Net income = $107,200

b. Addition to retained earnings = $72,700  

Explanation:

a. What is the net income for the firm?

Net income which also referred to a s net earnings is estimated by deducting cost of goods sold, selling and distribution expenses, administrative expenses, depreciation expenses, interest expenses, taxes, and other relevant expenses from sales.

b. What is the addition to retained earnings?

Addition to retained earnings is obtained by deducting the cash dividends from the net income.

For this question, the net income and addition to retained earnings can be calculated by preparing an income statement as follows:

Shelton, Inc.

Income Statement

For the year ....

Particulars                                           $                 

Sales                                             435,000

Costs of sales                             (216,000)  

Gross profit                                   219,000

Depreciation expense                 (40,000)

Interest expense                          (21,000)  

Income before tax                        158,000

Tax ($158,000 * 35%)                  (55.300)  

Net income                                   102,700

Cash dividends                            (30,000)  

Addition to retained earnings     72,700  

Therefore, Net income is $107,200, and addition to retained earnings is $72,700.