Muder's Market has sales of $28,400, net income of $2,250, and a retention ratio of 60 percent. Assume the profit margin and the payout ratio are constant and sales increase by 6 percent. What is the pro forma retained earnings if the current retained earnings balance is $4,100?

Question

Quizplus · Accepted Answer

The net income increases by 6% due to the sales increase, so the new net income is $2,250 * 1.06 = $2,385. The retained earnings from this income is 60% of $2,385, which is $1,431. Adding this to the current retained earnings of $4,100 gives $4,100 + $1,431 = $5,531.

Muder's Market Has Sales of $28,400, Net Income of $2,250