Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: DuPont Model for Return on Equity (ROE)

Financial Accounting

14. Financial Statement Analysis

Ratios: DuPont Model for Return on Equity (ROE)

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Multiple Choice

A company with net sales of $820,000 and net income of $210,000, average total assets of $1,400,000 and average common equity of $940,000 is using the DuPont Model for financial analysis. What is the company's ROE?

22.3%

87.2%

15.0%

58.5%

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Verified step by step guidance

Understand the DuPont Model: The DuPont Model breaks down Return on Equity (ROE) into three components: Profit Margin, Asset Turnover, and Equity Multiplier.

Calculate Profit Margin: Profit Margin is calculated as Net Income divided by Net Sales. Use the formula: $ \text{Profit Margin} = \frac{\text{Net Income}}{\text{Net Sales}} $.

Calculate Asset Turnover: Asset Turnover is calculated as Net Sales divided by Average Total Assets. Use the formula: $ \text{Asset Turnover} = \frac{\text{Net Sales}}{\text{Average Total Assets}} $.

Calculate Equity Multiplier: Equity Multiplier is calculated as Average Total Assets divided by Average Common Equity. Use the formula: $ \text{Equity Multiplier} = \frac{\text{Average Total Assets}}{\text{Average Common Equity}} $.

Combine the components to find ROE: Multiply the Profit Margin, Asset Turnover, and Equity Multiplier to find the ROE. Use the formula: $ \text{ROE} = \text{Profit Margin} \times \text{Asset Turnover} \times \text{Equity Multiplier} $.