What is the net effect on retained earnings of your firm of the following transa

Question

What is the net effect on retained earnings of your firm of the following transactions made by your firm during the current year? Ignore any aspect not mentioned here, for example, taxes.

Bought raw material with cash worth      $90,000

Borrowed long-term from the bank          $250,000

Sold product for a revenue of     $500,000

The cost to manufacture the product sold during the current year was     $150,000

Paid a cash dividend per share of              $0.50

Number of shares outstanding   $100,000

$460,000 ($40,000) $300,000 $350,000

Explanation / Answer

Over the year, retained earnings can increase or decrease or remain constant. These fluctuations will be due primarily to one of three events in a business's cash flow and they are net gains, net losses or paying out dividends

The net effect on retained earnings of the firm of the transactions made by the firm during the current year-

Sold product for a revenue of     $500,000

Less bought raw material with cash worth      $90,000

Less the cost to manufacture the product sold during the current year was     $150,000

Less cash Dividend paid during the year = number of shares outstanding * cash dividend paid per share

= 100,000 * $ 0.50 = $ 50,000

Now retained earnings of the firm = $ 500,000 - $ 90,000 - $ 150,000 - $ 50,000

= $ 210,000

Here the interest rate expenses for the year should be deducted from the above amount of $210,000 to get the retained earnings for the period but we don’t know effective interest rate for the period so enable to calculate the exact amount.

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