Here is some financial statement information for a business. Calculate the return on equity ratio for the current year.

Prior year Current year
Cash 199 208
Accounts receivable 234 235
Short-term investments 227 265
Inventory 233 104
Property, plant and equipment 1,106 1,091
Sales 4,000 4,500
Net profit 2,000 2,278
Share capital 3,500 3,700
Retained earnings, closing balance 7,000 8,000

Calculate your answer as a percentage rounded to one decimal place. Do your rounding at the end of the calculation.

Question

Here is some financial statement information for a business. Calculate the return on equity ratio for the current year.

Prior year	Current year
Cash	199	208 
Accounts receivable	234 	235 
Short-term investments	227 	265 
Inventory	233 	104 
Property, plant and equipment	1,106 	1,091 
Sales	4,000	4,500
Net profit	 2,000	2,278
Share capital	 3,500	3,700 
Retained earnings, closing balance	7,000	8,000

Calculate your answer as a percentage rounded to one decimal place. Do your rounding at the end of the calculation.

BlackTom AI · Accepted Answer

To determine return on equity (ROE), we first restate what ROE measures: it is the net profit available to shareholders relative to the equity they have invested in the company.

Option: We compute ROE using net profit for the current year divided by the average shareholders' equity over the year.

Step 1 — Identify net profit for the current year: from the data, Net profit = 2,278.

Step 2 — Determine equity at the start and end of the year: 
- Opening equity = Share capital (opening) + Retained earnings (opening) = 3,500 + 7,000 = 10,500. 
- Closing equity = Share capital (closing) + Retained earnings (closing) = 3,700 + 8,000 = 11,700.

Step 3 — Compute average equity for the year: (Opening equity + Closing equity) / 2 = (10,500 + 11,700) / 2 = 11,100.

Step 4 — Calculate ROE: Net profit / Average equity = 2,278 / 11,100 ≈ 0.2050, which as a percentage is 20.5%.

Step 5 — Rounding instruction: round to one decimal place, which yields 20.5%.

Additional note — alternative baselines: Some texts or problems might use different bases for equity (for example, using closing equity only or excluding certain non-operational items). If you were to use closing equity alone (11,700) you would get 2,278 / 11,700 ≈ 19.5%, and if you used a different average equity figure such as 9,000, you could arrive at 25.3%, but that would reflect a nonstandard definition or a mismatch in the base figures provided. The standard approach with the given numbers is 20.5%.

BACC011 Week 6: Practice Quiz

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