Question

Jones Hardware had common stock of $9,500 and retained earnings of $3,800 at the beginning of the year. At the end of the year, the common stock balance is $9,600 and the retained earnings account balance is $4,200. The net income for the year is $840. What is the retention ratio?

1. 40.48 %

2. 47.62 %

3. 59.52 %

4. 52.38%

Answer 1

Retention ratio is the percentage of net income that is retained in the year instead of paying as dividend to shareholders. It is opposite of payout ratio.

Here, the retained earnings at the beginning of the year = $3,800

Retained earnings at the end of the year = 4,200

It means during the year $ 400 from the current year income is retained in the firm.

Net income for the year = $840

Retention ratio = Retained earnings / Net income

= 400 / 840

= 0.47619 (approx)

or

= 47.62 % (approx)

hence option 2 is correct.