Use this financial statement to answer the following question(s):

-Refer to the financial statement above.Assume that this is the company's first year of business.During the year,the company paid $1,000 in dividends to its owner.Net income for the year must have been ________.
A)$500
B)$2,000
C)$1,500
D)$3,000

Question

Use this financial statement to answer the following question(s):

-Refer to the financial statement above.Assume that this is the company's first year of business.During the year,the company paid $1,000 in dividends to its owner.Net income for the year must have been ________.
A)$500 
B)$2,000 
C)$1,500 
D)$3,000

Quizplus · Accepted Answer

If the company paid $1,000 in dividends to the owner, it means that this amount was taken out of the net income. Therefore, we can calculate the net income by adding the dividends paid to the owner to the profit after tax. 
Net Income = Profit after tax + Dividends paid to the owner 
$2,000 + $1,000 = $3,000 
Thus, the net income for the year must have been $3,000. However, we need to keep in mind that the question asks us for the profit after tax for the first year of business. This means that we need to assume that the profit before tax is equal to the profit after tax. Therefore, the net income for the year must have been $1,500 (which is half of the profit before tax of $3,000). Therefore, the correct answer is C.

Use This Financial Statement to Answer the Following Question(s)