Calculation

[Mariz]

A corporation reports an increase in retained earnings of $2.4 billion and dividends of $1.6 billion. What is the amount of net income?

Answer is 4 billion. how and why?

 

[Fidget]

It's because the net income figure is arrived at before declaring dividends. So, as it tells you that the *increase* going to retained earnings is $2.4bn, it's telling you that that is what's left after taking the dividends into account. And since dividends are $1.6bn, then the original net income must've been $4bn ($2.4bn + $1.6bn). $2.4bn goes to retained earnings, $1.6bn is paid out in dividends.

 

[Mariz]

Do "increase" in retained earnings meant the ending retained earnings or in other words, the change in retained earnings, right?

 

[Samir]

Do "increase" in retained earnings meant the ending retained earnings or in other words, the change in retained earnings, right?

Yes.

I thought of it this way since a lot of things were implied--Corporation is reporting yearly reports and says that the retained earnings has increased 2.4b after paying out 1.6b in dividends, which otherwise would have also been retained earnings. 2.4+1.6=4b.