Retained Earnings Calculation for CFA® Level 1 Exam

Calculating Retained Earnings | CFA® Level 1 Exam Prep

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Question

A firm had retained earnings of $100,000 at the beginning of the year. During the year, the firm had a net income of $55,000 and paid dividends worth $20,000.

Then, the change in the firm's retained earnings equals ________.

Answers

Explanations

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A. B. C. D.

B

Ending retained earnings = Beginning retained earnings + Net Income - Dividends paid. Hence, change in retained earnings = $55,000-$20,000 = $35,000.

To calculate the change in retained earnings for a firm, you need to consider the net income and dividends paid during the year.

Retained earnings represent the portion of a company's net income that is retained or reinvested in the business rather than distributed to shareholders as dividends. It is calculated as the beginning retained earnings plus net income minus dividends.

Given the information provided:

Beginning retained earnings = $100,000 Net income = $55,000 Dividends paid = $20,000

To calculate the change in retained earnings, you can use the following formula:

Change in retained earnings = Beginning retained earnings + Net income - Dividends paid

Plugging in the values:

Change in retained earnings = $100,000 + $55,000 - $20,000

Change in retained earnings = $135,000

Therefore, the correct answer is D. $135,000. The change in the firm's retained earnings is $135,000.

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