Below are the two most recent balance sheets and most recent income statement fo

Question

Below are the two most recent balance sheets and most recent income statement for Outlook Industries. The company has an effective tax rate of 35%. Balance Sheet 2014 2013 Assets: Cash $10,000 $6,000 Accounts Receivable (net) 6,000 1,500 Inventory 8,000 10,000 Long-lived assets 12,000 11,000 Less: Accumulated depreciation (4,000) (2,000) Total assets $32,000 $26,500 Liabilities and Stockholders’ Equity: Accounts payable $5,000 $6,000 Deferred revenues 1,000 2,000 Long-term note payable 10,000 10,000 Less: Discount on note payable (800) (1,000) Common stock 12,000 6,000 Retained earnings 4,800 3,500 Total liabilities and stockholders’ equity $32,000 $26,500 Income Statement For the year ended December 31, 2014 Sales $42,000 Cost of goods sold (24,000) Depreciation expense (2,000) Interest expense (3,000) Bad debt expense (2,000) Other expense (including income taxes) (9,000) Net income $2,000 Refer to the information for Outlook Industries. The return on common shareholders’ equity for Outlook Industries for 2014 is 11.9% 13.5% 10% 15.2%

Explanation / Answer

Net Income = $2000

Common Shareholders' equity = Common Stock + Retained Earnings

= $12000 + $4800

= $16800

Return on Common Shareholders' Equity

= Net Income / Common Shareholders' Equity

= $2000 / $16800

= 0.1190

= 11.90%

Correct Option is 11.9%

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