During the year, ChemWash Corporation has $270,000 in revenues, $155,000 in expenses, and $4,000 in dividend declarations and payments. Net income for the year was A. $115,000. B. $119,000. C. $159,000. D. $270,000.
The correct answer and explanation is:
The correct answer is A. $115,000.
Explanation:
Net income is calculated by subtracting total expenses from total revenues. In this case, the formula for net income is: Net Income=Revenues−Expenses\text{Net Income} = \text{Revenues} – \text{Expenses}
So, we have: Net Income=270,000−155,000=115,000\text{Net Income} = 270,000 – 155,000 = 115,000
This amount represents the profit ChemWash Corporation made from its operations for the year before considering dividends. Dividends, although an important financial activity, are not subtracted when calculating net income. They are paid out after net income is calculated.
Here’s a quick breakdown of the terms involved:
- Revenues: This is the total amount of money earned by the company from its core business activities, which in this case is $270,000.
- Expenses: These are the costs incurred by the company in order to generate its revenue. In this case, the expenses are $155,000.
- Net Income: This is the remaining amount after subtracting expenses from revenues. Net income is $115,000 here, as calculated above.
- Dividends: While dividends of $4,000 were declared and paid, they do not affect the net income calculation. They are a distribution of profits to shareholders, occurring after net income is determined.
The key point to remember is that net income is focused on the profit from business operations, whereas dividends are a separate decision made by the company’s management, affecting how much profit is returned to shareholders, but not the net income itself.