Any accountants out there?

[Ginofan]

I've got some accounting homework and I'm having issues with figuring out Return on Common Stockholders Equity.

The ratio given in my book is Return on Common Stockholder Equity = Net Income - Preferred Dividends divided by Average Common Stockholder Equity.


Problem 17-4A: Calculation of financial statement ratios L.O. P3

Selected year-end financial statements of Cadet Corporation follow. (All sales are on credit; selected balance sheet amounts at December 31, 2008, were inventory, $47,900; total assets, $199,400; common stock, $80,000; and retained earnings, $53,348.)

CADET CORPORATION
Income Statement
For Year Ended December 31, 2009

Sales: $456,600
Cost of goods sold: $297,650
Gross profit: $158,950
Operating expenses: $99,600
Interest expense: $4,800
Income before taxes: $54,550
Income taxes: $21,975
Net income: $32,575

CADET CORPORATION
Balance Sheet
December 31, 2009
Assets
Cash: $20,000
Short-term investments: $8,000
Accounts receivable, net: $34,000
Notes receivable (trade)*: $7,000
Merchandise inventory: $36,150
Prepaid expenses: $2,800
Plant assets, net: $147,300
Total assets: $255,250

Liabilities and Equity
Accounts payable: $20,500
Accrued wages payable: $2,800
Income taxes payable: $3,800
Long-term note payable, secured
by mortgage on plant assets:$71,400
Common stock: $80,000
Retained earnings: $76,750
Total liabilities and equity: $255,250
* These are short-term notes receivable arising from customer (trade) sales.

So given all of that what I did was:

$32,575 - $0 divided by $80,000 = 40.7%

But when I input that answer into the online homework manager it says it's incorrect.

Any idea what I'm doing wrong?

[CosmicCowboy]

Good thing I'm not an accountant.

By my Cowboy Accounting Return on Equity would be:

$32,575 divided by $80,000 + $76,750 (undistributed retained earnings) or 20.78%

BTW, the $80,000 + 76,750 also equals net worth (Assets minus liabilities)

[Ginofan]

Thanks CC for trying, but that's not working out either. I appreciate it though!

[NASpurs]

Isn't the Return on Common Stockholders' Equity

Net Income/Average Common Stockholders' Equity

in which "Average Common Stockholders' Equity" meaning that the denominator is what the equity was in the beginning of the year + what it was at the end of the year dividing the total of that amount by 2?

If the company has preferred stock, that's when you subtract the net income - the preferred dividends.

[NASpurs]

Here's another equation:

Common stock + retained earnings = total stockholders' equity (without liabilities of course)

[NASpurs]

So this is my math (hope I did it correctly):

32, 575 / [(80,000+ 53,348) + (80,000 + 76,750) ]/2=

32,575/(133,348+156,750)/2 =

32,575/145,049 = 22.5%

[spursfan09]

Does the problem say how long in the year the common stock was outstanding?

[NuGGeTs-FaN]

Return on equity = earnings after tax and interest charges/ordinary shareholders equity

That is coming from my Aussie head + textbook :smokin

$32,575/156,750 x 100 = 20.78%

[spursfan09]

Yeah, sometimes I'm just too analytical.

[mffl89]

What accounting are you in?
Could you also show the entire problem?

[mffl89]

Try $9,173 for the Preferred Dividends. You'll end up with 29.3%.

I got it from Beg RE = $53,348
+ NI = $32,575
< End RE = $76,750>
Div. = $9,173

[Ginofan]

So this is my math (hope I did it correctly):

32, 575 / [(80,000+ 53,348) + (80,000 + 76,750) ]/2=

32,575/(133,348+156,750)/2 =

32,575/145,049 = 22.5%

Yes! This is correct. I had emailed my professor last night and she pointed out that Stockholders Equity does include retained earnings and paid in capital, that's what I was missing.

Thanks for the help and suggestions everyone!