A firm has net income of $439,000 on sales of $690,000. Sales are expected to increase by 4% next year and the dividend payout ratio is 40%. The firm uses the percentage of sales approach when compiling pro forma statements. What amount is expected to be added to retained earnings next year?

Question

Quizplus · Accepted Answer

First, we need to calculate the dividends that will be paid out next year:

Dividends = Net Income x Dividend Payout Ratio 
Dividends = $439,000 x 0.4 
Dividends = $175,600

Next, we need to calculate the projected net income for next year:

Projected Sales = Current Sales x (1 + Growth Rate) 
Projected Sales = $690,000 x (1 + 0.04) 
Projected Sales = $717,600

Projected Net Income = Projected Sales x Net Income Margin 
Projected Net Income = $717,600 x (439,000/690,000) 
Projected Net Income = $455,936

Finally, we can calculate the amount that is expected to be added to retained earnings:

Retained Earnings = Projected Net Income - Dividends 
Retained Earnings = $455,936 - $175,600 
Retained Earnings = $280,336

Therefore, the answer is C) $273,936.

A Firm Has Net Income of $439,000 on Sales of $690,000