For the current year, Company A had sales of $450,000, net income of $290,000 and average common Stockholders' Equity of $940,000. During the same year, Company B had sales of $200,000, net income of $160,000 and average common Stockholders' Equity of $410,000. Which of the following statements is TRUE regarding this situation?

Question

Quizplus · Accepted Answer

Return on Equity (ROE) is calculated by dividing net income by average common Stockholders' Equity.

For Company A: 
ROE = $290,000 ÷ $940,000 = 30.85%

For Company B: 
ROE = $160,000 ÷ $410,000 = 39.02%

Therefore, choice B is correct as Company B has a better return on equity than Company A.

For the Current Year, Company a Had Sales of $450,000