This workout asks us to calculate the retained earnings balance at the end of the period Now there's a crucial piece of information given to us now Preference shares have been treated as debt in the financials This means that preference dividends will be interest and we'll see that coming up in just a moment So we're now given some information, sales, operating expenses, tax That's going to help us calculate our net income, we'll need that in just a second! We're also given retained earnings at the end of the prior year. Some preference shares, preference dividends and common stock What we need to firstly, is come up with our value for net income The reason for this is that we will put net income into a BASE analysis and that BASE analysis will help us work out ending retained earnings So let's start with this little income statement to calculate net income So we start with sales and I just link that straight to the figure above and operating expenses, again I can just link to the figure above Now interest, that comes from the preference shares. We were told there's 150,000 and we multiply that by the 6.75% dividend That gives me my interest figure. Now crucially when I come to calculate my net income, I'll take off that interest Tax? Already given. And now I get to net income, it's going to be sales minus the sum of those expenses Important, the preference interest has already gone through this calculation. Preference dividend has gone through Okay, so I've got my net income. I now want to move onto the BASE analysis and I've got the beginnings of that here I start with my beginning retained earnings, so that is just the end of the prior year's figure, that's also the start of this year's figure I add onto that net income, so what makes my retained earnings go up? Yes, net income What do I subtract off of that? Ahh common dividends, of course. Not all of my net income flows through into retained earnings Some of it is actually being paid out as common dividend Why didn't I also put the preference dividend through here? Because the preference dividend has already gone through the net income It's included in that net income there, I don't want to include it a second time (that would be double counting) So I can now calculate my ending retained earnings. I take my beginning figure, add on the net income and subtract off those common dividends And I've now got my ending retained earnings