Multiple Choice
The ratio of net profit to total owners' equity is called return on:
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14. Financial Statement Analysis
Ratios: Return on Equity (ROE)
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XYZ Company had net sales during the period of $380,000 and net income of $60,000. If total equity was $480,000 at the beginning of the period and $720,000 at the end of the period, what is the company's ROE?
A
8%
B
10%
C
13%
D
63%
Verified step by step guidance1
Understand that ROE (Return on Equity) is calculated using the formula: \( \text{ROE} = \frac{\text{Net Income}}{\text{Average Equity}} \times 100 \).
Calculate the average equity for the period. This is done by taking the sum of the beginning equity and the ending equity, then dividing by 2: \( \text{Average Equity} = \frac{\text{Beginning Equity} + \text{Ending Equity}}{2} \).
Substitute the given values into the average equity formula: \( \text{Average Equity} = \frac{480,000 + 720,000}{2} \).
Substitute the net income and the calculated average equity into the ROE formula: \( \text{ROE} = \frac{60,000}{\text{Average Equity}} \times 100 \).
Calculate the ROE percentage by performing the division and multiplication in the formula to find the correct answer.
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