The 2021 income statement for Anderson TV and Appliance reported net sales of $420,000 and net income of $65,000. Average total assets for 2021 was $800,000. Shareholders' equity at the beginning of the year was $500,000, and $20,000 was paid to shareholders as dividends. There were no other shareholders' equity transactions that occurred during the year.

Calculate the profit margin on sales, return on assets, and return on equity for 2021.

how do i calculate roe

A. The profit margin on sales=15.48%

B. The return on assets=8.125%

C. The return on equity=11.93%

Explanation:

A.

Step 1: Determine the profit margin

The formula for calculating the profit margin can be expressed as;

P. M = (N. I/N. S) * 100

where;

P. M=profit margin

N. I=net income

N. S=net sales

In our case;

P. M=unknown, to be determined

N. I=$65,000

N. S=$420,000

Substituting;

P. M = (65,000/420,000) * 100=15.48%

The profit margin on sales=15.48%

B.

Step 2: Determine the return on assets

The formula for calculating the return on assets can be expressed as;

R. O. A = (N. I/A. T. A) * 100

where;

R. O. A=return on assets

N. I=net income

A. T. A=average total assets

In our case;

R. O. A=unknown

N. I=$65,000

A. T. A=$800,000

Substituting;

R. O. A = (65,000/800,000) * 100

R. O. A=0.08125*100=8.125%

C.

Step 3: Determine the return on equity

The formula for calculating the return on equity can be expressed as;

ROE = (N. I/A. T. E) * 100

where;

ROE=return on equity

N. I=net income

A. T. E=average total equity

In our case;

ROE=unknown, to be determined

N. I=$65,000

A. T. E = (shareholder's equity at the beginning of the period+net income-dividends) and;

shareholder's equity at the beginning of the period=$500,000

net income=$65,000

dividends=$20,000

A. T. E=500,000+65,000-20,000=$545,000

Substituting;

ROE = (65,000/545,000) * 100

ROE=11.93%