Use the information in Exercise 1-18 to prepare a December statement of retained earnings for Ernst Consulting. Hint: Retained Earnings on December 1 was $0.
Cash: $11,360
Accounts receivable: 14,000
Office supplies: 3,250
Office equipment: 18,000
Land: 4
Accounts payable: 8.1
Common stock: 84,000
Cash dividends: 2,000
Consulting revenue: 14,000
Rent expense: 3,550
Salaries expense: 7,000
Telephone expense: 760
Miscellaneous expenses: 580
Answer (2)
Calculate the ending retained earnings by adding the net income to the beginning retained earnings and subtracting the cash dividends.
Beginning Retained Earnings: $0 - Net Income: $2,110
Cash Dividends: $2,000 - Ending Retained Earnings = Beginning Retained Earnings + Net Income - Cash Dividends = $0 + $2,110 - $2,000 = 110 − T h ee n d in g re t ain e d e a r nin g s i s \boxed{ 110} .
Explanation
Understanding the Problem We are asked to prepare a statement of retained earnings for Ernst Consulting for the month ended December 31. We are given the net income for the month, the cash dividends paid, and the beginning retained earnings balance. The statement of retained earnings shows the changes in retained earnings during a period.
Formula for Retained Earnings The formula for calculating the ending retained earnings is:
Ending Retained Earnings = Beginning Retained Earnings + Net Income - Cash Dividends
Calculating Ending Retained Earnings We are given:
Beginning Retained Earnings = $0 Net Income = $2,110 Cash Dividends = $2,000
Plugging these values into the formula, we get:
Ending Retained Earnings = $0 + $2,110 - $2,000 = $110
Preparing the Statement Now, we prepare the statement of retained earnings:
Ernst Consulting Statement of Retained Earnings For the Month Ended December 31
Beginning Retained Earnings, December 1: $0 Add: Net Income: $2,110 Less: Cash Dividends: $2,000 Ending Retained Earnings, December 31: $110
Examples
Understanding retained earnings is crucial for assessing a company's financial health. For instance, imagine you're analyzing whether a company can afford to expand its operations. By examining the statement of retained earnings, you can see how much profit the company has kept over time, which can be used for reinvestment. A healthy retained earnings balance indicates the company has been profitable and has chosen to reinvest its earnings rather than distribute them as dividends, signaling potential for future growth. This analysis helps in making informed investment decisions and understanding a company's long-term financial strategy.
To calculate the December statement of retained earnings for Ernst Consulting, we start with $0 retained earnings, add the net income of $2,110, and subtract cash dividends of $2,000, resulting in ending retained earnings of $110. The formula used is: Ending Retained Earnings = Beginning Retained Earnings + Net Income − Cash Dividends . This is presented in a formal statement format summarizing the changes for the month.
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