Question

Pharrell, inc., has sales of $593,000, costs of $265,000, depreciation expense of $67,000, interest expense of $34,000, and a tax rate of 35 percent. the firm paid out $40,000 in cash dividends. what is the addition to retained earnings? (do not round intermediate calculations and round your answer to the nearest whole number,
e.g., 32.)

Answer 1

The income statement begins with revenues and subtracts costs to arrive at Earnings before Interest and Taxes (EBIT).

We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

Income statement

Sales $593000

Costs (265000)

Depreciation (67000)

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EBIT $261000

Interest (34000)

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Taxable income $227000

Taxes (35%) (79450)

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Net income $147550

The dividends paid plus the addition to retained earnings must equal net income, so:

Net income = Dividends + Addition to retained earnings

$147550 = $40,000 + Addition to retained earnings

Addition to retained earnings = $147550– 40,000

Addition to retained earnings = $107550