Question

The statement of stockholders’ equity—or the statement of retained earnings—reconciles and reports a firm’s net income, dividends paid, shares issued and repurchased, and change in retained earnings during a particular year.

Which of the following best describes a firm’s stockholders’ equity?

Equity is the sum of what a corporation’s initial stockholders paid when they bought company shares and the earnings that the company has retained over its years of operations.

Equity is the difference between a corporation’s paid-in capital and its retained earnings.

Yesterday, Purple Whale Foodstuffs Inc. released its annual results and financial statements. Jagger is reading the summary in the business pages of today’s paper’s website. In its annual report this year, Purple Whale Foodstuffs reported a net income of $6,200,000. Last year, the company reported a retained earnings balance of $4,675,000, whereas this year it increased to $5,500,000. How much was paid out in dividends this year?

$5,375,000

$7,025,000

$6,181,250

$4,837,500

Answer 1

1. Equity is the sum of what a corporation’s initial stockholders paid when they bought company shares and the earnings that the company has retained over its years of operations

Equity or Shareholders Equity is either Assets - Liabilities or Share capital + Retained Earnings. Equity is primarily what is left in the corporation after all the debts have been paid off. Equity can be either Positive or negative depending on the firms performance.

2. Retained year for present year = Previous year (beginning) retained earning + net income - dividend

5,500,000 = 4,675,000 + 6,200,000 - dividend

dividend = 4,675,000 + 6,200,000 - 5,500,000

dividend = 5,375,000 ( option 1)