When you calculate a company's annual net income, you have to consider the company's assets, liabilities, and whether cash dividends or new stock have been issued. The following practice questions ask you to calculate annual net income, with and without cash dividends.
Practice questions
At the end of its first year, a company estimates its end-of-year balances to be:
Total assets: $2,500,000
Total current liabilities: $800,000
Total long-term liabilities: $200,000
If there are no other equity transactions, what is the net income for the year?
At the end of its first year of operations, a company has total assets of $1,200,000, total current liabilities of $500,000, total long-term liabilities of $350,000, and paid cash dividends of $45,000. Calculate the total net income.
Answers and explanations
$1,500,000
Total assets are $2,500,000, and you calculate total liabilities by adding current liabilities of $800,000 and long-term liabilities of $200,000 for a total of $1,000,000. Then, you simply take total assets of $2,500,000 less total liabilities of $1,000,000 to get equity of $1,500,000. In this problem, there are no cash dividends and no new stock issued. As a result, the entire equity balance is due to net income.
$395,000
You usually calculate total net income as total revenues less total expenses. However, from the balance sheet you can also calculate net income as total net worth plus cash dividends less issued stock. First, you calculate net worth as total assets minus total liabilities. In this case, total assets equal $1,200,000. You calculate total liabilities as current liabilities of $500,000 plus long-term liabilities of $350,000 for a total of $850,000. When you know total liabilities, you can go back to the original equation and take total assets of $1,200,000 less total liabilities of $850,000 to get a total net worth of $350,000. Then, you simply take the calculated net worth of $350,000 and add the cash dividends of $45,000 to get net income of $395,000. There was no stock issued in this example.
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