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Flashcards: Calculate Fluctuations & Ratios

The Washington Company starts the year with $800,000 in assets and $300,000 in liabilities. During the year the company reported net income of $200,000 and paid dividends during the year of $40,000. No other equity transactions took place. What was the company's return on equity for the period?

27.60%

34.50%

30.30%

24.20%

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Flashcards: Calculate Fluctuations & Ratios

Your answer:

27.60%

Your answer:

30.30%

Your answer:

24.20%

Correct answer:

34.50%

Explanation:

Return on equity is calculated by dividing net income by average owner's equity. Beginning owner's equity is the difference between beginning assets and liabilities ($800K - $300K = $500K). Ending owner's equity is beginning equity of $500K + net income of $200K - dividends paid of $40K = $660K. This makes average equity $580K, and return on equity is $200K dividend by $580K.

Flashcards: Calculate Fluctuations & Ratios

At the end of Year 1, the Walter Company reported net income of $630,000. The company paid cash dividends of $20,000 per quarter on its preferred stock. The company started the year with 80,000 shares of common stock outstanding and 50,000 shares of preferred stock outstanding. On April 1, the company issued an additional 16,000 shares of common stock and 8,000 shares of preferred stock. What should the company report as basic earnings per share?

$5.54

$5.98

$6.56

$5.73

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Flashcards: Calculate Fluctuations & Ratios

Your answer:

$5.54

Your answer:

$6.56

Your answer:

$5.73

Correct answer:

$5.98

Explanation:

Basic EPS is calculated as (net income - preferred dividends)/average common shares outstanding. $80K in preferred dividends were paid during the year ($20K x 4 quarters). Average common shares outstanding were 92K (80K beginning shares x 3/12 months plus 96K shares after the issuance x 9/12 months). Thus EPS is ($630K - $120K)/92K.

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All CPA Financial Accounting and Reporting (FAR) Resources

Flashcards: Calculate Fluctuations & Ratios

Flashcards: Calculate Fluctuations & Ratios

Flashcards: Calculate Fluctuations & Ratios

Flashcards: Calculate Fluctuations & Ratios

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