Question

To estimate the retained earnings balance on a pro-forma balance sheet, simply subtract preferred and common dividend payments from after-tax net income. True or false?

Answer 1

Hello Sir/ Mam

THE CORRECT ANSWER IS TRUE.

We know that in summarised form, balance sheet is an equation : Liabilities + Owner's Equity = Assets. The two sides have to balance. After we have net income calculated from Profit and loss Account, we have that income attributable to owners of the company to which we have to option to retain or distribute as dividend. We can distribute dividends to Preference shareholders and to common shareholders. The left-overs are retained by the company. Hence, retained earnings are calculated by subtracting preference and common dividend payments from after-tax net Income.

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.