Question

Comparative balance sheets for Softech Canvas Goods for 2024 and 2023 are shown below. Softech pays no dividends and instead reinvests all earnings for future growth. Comparative Balance Sheets ($ in thousands) December 31 2024 2023 Assets: Cash $ 92 $ 68 Accounts receivable 170 190 Short-term investments 78 68 Inventory 340 224 Property, plant, and equipment (net) 880 760 $ 1,560 $ 1,310 Liabilities and Shareholders’ Equity: Current liabilities $ 380 $ 280 Bonds payable 230 230 Paid-in capital 610 610 Retained earnings 340 190 $ 1,560 $ 1,310 Required: Determine the return on shareholders’ equity for 2024. What does the ratio measure?

Answer 1

The return on shareholders' equity for Softech Canvas Goods in 2024 is 15.79%, which measures how effectively the company uses the equity provided by its shareholders to generate profits.

Step-by-step explanation:

To determine the return on shareholders' equity for 2024, you can use the formula:

Return on Shareholders' Equity = Net Income / Average Shareholders' Equity

The net income can be calculated by subtracting the retained earnings of the previous year from the retained earnings of the current year. The average shareholders' equity is the average of the shareholders' equity at the beginning and end of the year. Using the balance sheets provided for Softech Canvas Goods, we can calculate as follows:

• 
  
• Net Income = Retained Earnings (2024) - Retained Earnings (2023) = $340,000 - $190,000 = $150,000
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• Average Shareholders' Equity = (Shareholders' Equity at the beginning of 2024 + Shareholders' Equity at the end of 2023) / 2 = ($610,000 + $340,000 + $610,000 + $190,000) / 2 = $950,000

The return on shareholders' equity for 2024 is:

Return on Shareholders' Equity = $150,000 / $950,000 = 0.1579 or 15.79%

This ratio measures how effectively a company is using its shareholders' equity to generate profit.