Part 2: Calculate The Retained Earnings Balance And Answer ✓ Solved
Part 2: Calculate the retained earnings balance, and answer
Part 2: Calculate the retained earnings balance, and answer the following questions 1. What is the time period covered by the statement? 2. How does this differ from the income statement? 3. What is the total equity? 4. What is total revenue? 5. What is total assets? 6. What is the balance (amount) of retained earnings? 7. What is total liabilities? 8. Can the company purchase an additional automobile for $20,000?
Paper For Above Instructions
Calculating retained earnings is a crucial aspect of understanding a company's financial health, as this figure reflects the portion of net income that is retained within the company rather than distributed to shareholders as dividends. In this analysis, we will calculate the retained earnings balance and answer the corresponding questions regarding the company's financial statements.
1. Time Period Covered by the Statement
The time period covered by a financial statement typically refers to the duration during which financial activities are reported. For retained earnings, this is often indicated in the title of the statement, which could be for the fiscal year or quarter ending on a particular date, such as "For the Year Ended December 31, 2023." This time frame shows how the retained earnings have changed due to the company's operational activities over that specific duration.
2. Difference Between Retained Earnings and Income Statement
The retained earnings statement and the income statement are distinctly different. The income statement provides a summary of revenues and expenses over a specific period, leading to net income or loss. In contrast, the retained earnings statement showcases how net income or loss is utilized - primarily, whether it is retained in the business or distributed as dividends. The retained earnings statement acts as a bridge between the income statement and the balance sheet, linking profitability to equity financing.
3. Total Equity
Total equity represents the ownership interest in the company, calculated as total assets minus total liabilities. It consists primarily of common stock, preferred stock, additional paid-in capital, and retained earnings. Understanding total equity is essential for stakeholders as it indicates the net worth of the company and how much shareholders would theoretically receive if the company liquidated all its assets and paid off all its debts.
4. Total Revenue
Total revenue refers to all income generated by the business from its operations before any expenses are deducted. This figure is critical as it reflects the effectiveness of the company’s sales and service delivery. Total revenue is reported on the income statement for the period, providing insight into business growth and market demand.
5. Total Assets
Total assets represent everything the company owns that has value, including cash, inventory, accounts receivable, property, plant and equipment, and investments. The total assets figure is vital because it indicates the resources a company can utilize to generate future revenue.
6. Balance of Retained Earnings
The balance of retained earnings is calculated by taking the previous period's retained earnings, adding the net income earned during the current period, and subtracting any dividends paid. For example, if the previous retained earnings were $50,000, net income for the year was $10,000, and dividends paid were $5,000, the retained earnings balance would be $55,000 ($50,000 + $10,000 - $5,000).
7. Total Liabilities
Total liabilities encompass all debts and obligations owed by the company to external parties. This includes accounts payable, short-term and long-term debt, and other financial liabilities. Knowing the total liabilities is crucial for assessing the financial leverage of the company and understanding the obligations it must meet in the future.
8. Ability to Purchase an Additional Automobile for $20,000
Whether the company can purchase an additional automobile for $20,000 depends on multiple factors, including its available cash reserves and cash flow situation. An evaluation of the current assets and short-term liabilities will help determine if the company has sufficient liquidity to make this purchase without financial strain. Additionally, understanding the implications on overall financial health after the acquisition is essential. If total liabilities exceed total assets significantly, or if cash flow projections are poor, the company may need to reconsider making such an investment.
Conclusion
Calculating retained earnings and understanding the associated financial metrics is vital for making informed business decisions. Each component — time period, revenue, equity, assets, and liabilities — plays a critical role in assessing overall business health. Therefore, precise calculations must be performed and strategically interpreted to guide executive decisions effectively.
References
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