For the current year, Blue Co. had net income of $200,000, beginning Stockholders' Equity $500,000 and ending Stockholders' Equity $535,000. Greene Co. had net income of $100,000, beginning Stockholders' Equity $900,000 and ending Stockholders' Equity $950,000. Which of the following statements is TRUE regarding this scenario?

Question

Quizplus · Accepted Answer

A higher return on equity (ROE) indicates better profitability, and in this scenario, Greene Co. has a higher ROE than Blue Co. However, Blue Co. has a higher level of earnings relative to the amount of stockholders' equity, which indicates more efficient use of its equity in generating profits. This is because the formula for ROE is net income divided by average stockholders' equity, and Blue Co. has a lower ending stockholders' equity compared to Greene Co. but still managed to generate a higher net income. Therefore, option C is correct. Options A, B, and D are incorrect.

For the Current Year, Blue Co