Q Bank question #2348 CFF 2004, net, financing, following, question

soverby

Can someone please explain this, it’s just not clicking:
Galaxy, Inc.’s balance sheet as of December 31, 2004 included the following information (in $):
Accounts Payable
300,000 123103
500,000 123104
Dividends Payable
200,000 123103
300,000 123104
Common Stock
1,000,000 123103
1,000,000 123104
Retained Earnings
700,000 123103
1,000,000 123104
Galaxy’s net income in 2004 was $800,000. What was Galaxy’s cash flow from financing (CFF) in 2004?
A) $500,000.
B) $300,000.
C) $700,000.
D) $400,000.
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Click for Answer and Explanation
Dividends declared in 2004 are net income less the increase in retained earnings ($800,000  $300,000 = $500,000). Dividends declared less the increase in dividends payable is dividends paid ($500,000 – ($300,000  $200,000) = $400,000). This is a cash outflow so it is a negative number. Dividends are always cash flow from financing. Note that accounts payable changes are included in cash flow from operations (CFO).

bcp901

Ok, I got it now. Since retained earnings went up $300,000 they must have paid the rest of their NI out in dividends, which would be $500,000. Since dividends payable went up $100,000 they only paid out $400,000.

optiix

The part that’s not clicking is why NI minus the increase in retained earnings is equal to dividends declared.