Question

What is the current year's return on equity (ROE)?

................................................................. Prior / Current

Accounts payable	???	???
Accounts receivable	320,715	397,400
Accruals	40,500	33,750
Additional paid in capital	500,000	541,650
Cash	17,500	47,500
Common Stock	94,000	105,000
COGS	328,500	429,565.00
Current portion long-term debt	33,750	35,000
Depreciation expense	54,000	55,706.00
Interest expense	40,500	42,701.00
Inventories	279,000	288,000
Long-term debt	338,332.00	400,482.00
Net fixed assets	946,535	999,000
Notes payable	148,500	162,000
Operating expenses (excl. depr.)	126,000	161,224.00
Retained earnings	306,000	342,000
Sales	639,000	848,909.00
Taxes	24,750	47,393.00

Answer 1

Answer -

Given

Current year data

Sales = $ 848909
COGS = $ 429565

Sales - COGS = Gross profit = $ 419344

Gross profit = $ 419344
Operating expeses ( exc Depreciation) = $ 161224
Depreciation expense = $ 55706

Gross profit - Operating expeses ( exc Depreciation) -  Depreciation expense = Operating Income
= $ 419344 - $ 161224 - $ 55706
= $ 202414

Therefore Operating income or EBIT = $ 202414
EBIT - Interest expense = EBT
EBT = $ 202414 - $ 42701
EBT = $ 159713
Net income or PAT = EBT - Taxes = $ 159713 - $ 47393 = $ 112320
Net income = $ 112320

Prior year

Equity = Common stock + Retained earnings
Equity = $ 94000 + $ 306000
Equity = $ 400000

Current year

Equity = Common stock + Retained earnings
Equity = $ 105000 + $ 342000
Equity = $ 447000

Average Total Equity = ($ 400000 + $ 447000) / 2 = $ 847000 / 2 = $ 423500

Return on Equity ( ROE) = Net income / Average Total Equity = $ 112320 / $ 423500 = 0.2652 = 26.52 %

Hence currect years ROE = 26.52 %