In Chapter 3 we have learned that net income is an increase in owners equity resulting from profitable operations. Previously, Chapter 2 explained that when a business is organized as a corporation, retained earnings represents the increase in stockholders equity that has accumulated over the years as a result of profitable operations. Thus, net income for any one year should explain a large part of the change in retained earnings from the beginning of the year to the end.

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Find net income for 2006. Now compute the difference between retained (reinvested) earnings at the beginning of the year and at the end. How closely does this approximate the 2005 net income?