Mayfair Corporation has outstanding 70,000 shares of $1 par value common stock as well as 20,000 shares of 7%, $100 par value cumulative preferred stock. At the beginning of the year, the balance in retained earnings was $800,000, and one year's dividends were in arrears. Net income for the current year is $580,000. Compute the balance in retained earnings at the end of the year if Mayfair Corporation pays a dividend of $3 per share on its common stock this year.

$890,000.

Explanation:

Net income, also known as Earnings After Tax, is the income the company has generated after paying for all the expenses including manufacturing, operating, administrative, interest, and taxes. The management retains a portion of this amount and distribute the remaining among its shareholders. Net Income has a credit balance. To close it, it is transferred to retained earnings by posting the following entry:

Net Income                          Debit

                 Retained Earnings                             Credit

Then the amount that is to be paid to shareholders is deducted from retained earnings.

In this case, retained earnings has an opening balance of $800,000. The Net Income for the year is added with this figure. Out of the total retained earnings, dividends of preferred shareholders are paid including any cumulative, along with the dividends of common shareholders. The resulting amount is the Ending balance of retained earnings.

Calculation

Opening retained earnings                                                               $800,000

Add: Net income                                                                                  580,000

Less:

Arrears of preferred dividend (20,000 * 7% * 100)                           (140,000)

Preferred dividend of current year (20,000 * 7% * 100)                   (140,000)

Dividend on common stock (3 * 70,000)                                          (210,000)

Retained earnings at year end                                                        $890,000

both are integral parts of a corporate balance sheet. the cash flow statement, or statement of cash flows, measures the sources of a company's cash and its uses of cash over a specific time period. the income statement measures a company's financial performance, such as revenues, expenses, profits or losses over a specific time period (in fact, it's sometimes called a statement of financial performance).

a cash flow statement shows exactly how much money a company has received and how much it has spent, traditionally over a period of one month. it captures the current operating results and changes on the balance sheet, such as increases or decreases in accounts receivable or accounts payable, and does not include noncash accounting items such as depreciation and amortization. the cash flow generally comes from revenue received as a result of business activity, but it may be augmented by funds available as a result of credit. a cash flow statement is used to determine the short-term viability and liquidity of a company, specifically how well it is positioned to pay its bills and vendors.

forbearance of student loan payments. under forbearance, your loan payments are postponed (or reduced) but interest continues to accrue during the period of forbearance. if you don't pay the interest during that period, the interest may be “capitalized,” which means it is added to your principal balance.