Balance Sheet for year-ended Dec 31 ($000's)

-Blockbuster Inc.
Income Statement for year-ended Dec 31 ($000's)

Referring to the Blockbuster financial statements,what is the most important underlying reason for the change in ROE?
A) Decrease in cost of goods sold
B) Increase in debt caused the debt/equity ratio to rise
C) Increase in sales resulted in an increase in product returns which caused inventory turnover to decline
D) Increase in cost of goods sold caused a big drop in gross margin
E) Decrease in debt

Question

Balance Sheet for year-ended Dec 31 ($000's)
 
-Blockbuster Inc.
Income Statement for year-ended Dec 31 ($000's)

Referring to the Blockbuster financial statements,what is the most important underlying reason for the change in ROE?
A) Decrease in cost of goods sold 
B) Increase in debt caused the debt/equity ratio to rise 
C) Increase in sales resulted in an increase in product returns which caused inventory turnover to decline 
D) Increase in cost of goods sold caused a big drop in gross margin 
E) Decrease in debt

Quizplus · Accepted Answer

Cost of goods sold rises from Year 1 to Year 2. Debt falls-it does not rise. Inventory turnover improves from Year 1 (8.4) to Year 2 (11.9). Gross margin falls substantially due to an increase in cost of goods sold. Debt declines (as measured by the equity multiplier). The decline is quite small. Had ROA remained constant at the Year 1 level (-0.92%), the decline in leverage would have caused an increase in ROE from -1.3% to -1.24%.

Balance Sheet for Year-Ended Dec 31 ($000's)