Question

The balance sheet of Sand Sportswear reports total equity of $500,000 and $650,000 at the beginning and end of the year, respectively. The return on equity for the year is 20%. What is Sand Sportswear's net income for the year?

a. $100,000.
b. $130,000.
c. $2,875,000.
d. $115,000.

Answer 1

d. $115,000

Step-by-step explanation:

The calculation of Sand Sportswear's net income for the year is as seen below;

Return on equity = Net income / Average total equity

Return on equity = 20%

Average total equity = ($500,000 + $650,000) / 2 = $575,000

Therefore,

Net income = Average total equity × Return on equity

Net income = $575,000 × 20%

Net income = $115,000