H&R Block, Inc. is a well-known income tax services firm. Information for 2004 and 2003 from the company’s annual report is presented below.16 (All numbers are in thousands.) Three students who were looking at H&R Block’s annual report were overheard to make the following comments:

Student A: What a great year H&R Block had in 2004! The company earned income of $612,718,000 because total assets increased from

$4,767,308,000 to $5,380,026,000.

Student B: But the company didn’t do that well because the change in total assets isn’t the same as net income! The company had a net income of only

$196,303,000 because its cash increased from $875,373,000 to $1,071,676,000.

Student C: I see from the annual report that H&R Block paid cash dividends of $138,397,000 in 2004. Don’t you have to take that into consideration when analyzing the company’s performance?

1. Comment on the interpretations of Students A and B, and then answer Student C’s question.
2. Calculate H&R Block’s net income for 2004. (Hint: Reconstruct the statement of retained earnings.)
Decision Analysis Using Excel Effect of Transactions on the Balance Sheet

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H&R Block, Inc. Condensed Balance Sheets December 31, 2004 and 2003 (In thousands) 2004 2003 Cash Other assets Total assets Assets $ 1,071,676 4,308,350 $ 875,373 3,891,935 $ 5,380,026 $ 4,767,308 Liabilities Total liabilities $ 3,483,017 $ 3,103,599 Stockholders' Equity Common stock $ (884,359)* $ (558,159)* 2,221,868 $ 4,767,308 Retained earnings 2,781,368 Total liabilities and stockholders' equity $ 5,380,026