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The Income Statement of XYZ Company for the most recent fiscal year is given below. Its...

The Income Statement of XYZ Company for the most recent fiscal year is given below. Its sales are projected to increase by 20% in the coming year and it always retains 60% of its net income. Use the percentage of sales method to find out the addition to retained earnings amount.  

Sales                                                              $40,000

Operating costs                                                   30,000       

   Earnings before interests and taxes $10,000

Interest expenses                                               1,000   

Earnings before taxes                                         $ 9,000  

Taxes (40%)                                                      3,600   

Net income       $   5,400

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Expert Solution

Growth rate = 20%
Retention ratio = 60%

Payout ratio = 1 - Retention ratio
Payout ratio = 1 - 0.60
Payout ratio = 0.40

Coming Year:

Sales = $40,000 + 20% * $40,000
Sales = $48,000

Operating costs = $30,000 + 20% * $30,000
Operating costs = $36,000

Earnings before interest and taxes = Sales - Operating costs
Earnings before interest and taxes = $48,000 - $36,000
Earnings before interest and taxes = $12,000

Interest expenses = $1,000

Earnings before taxes = Earnings before interest and taxes - Interest expenses
Earnings before taxes = $12,000 - $1,000
Earnings before taxes = $11,000

Taxes = 40% * Earnings before taxes
Taxes = 40% * $11,000
Taxes = $4,400

Net income = Earnings before taxes - Taxes
Net income = $11,000 - $4,400
Net income = $6,600

Dividends = 40% * Net income
Dividends = 40% * $6,600
Dividends = $2,640

Addition to retained earnings = Net income - Dividends
Addition to retained earnings = $6,600 - $2,640
Addition to retained earnings = $3,960

jeff jeffy answered 2 years ago
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