Question about Total Equity (1 Viewer)

[Ollier888]

I couldn't find the answer on the internet;

Net Profit = $75000
Owner's Investment = $125000


Formula for ratio given was; ( Net Profit / Total Equity ) *100
Would that be ( 75000 / 125000 + 75000 )

and the answer for Return on Equity ratio would be 37.5%

Is that right or wrong?

 

[jimmysmith560]

Did this come with any kind of financial document (balance sheet etc)?

 

[Ollier888]

Did this come with any kind of financial document (balance sheet etc)?

It was an income sheet and couldn't be found using Equity = Assets - Liabilites

 

[jimmysmith560]

It was an income sheet and couldn't be found using Equity = Assets - Liabilites

Would you be able to share the income statement here?

 

[Ollier888]

Would you be able to share the income statement here?

Was in an exam so I don't have it

 

[jimmysmith560]

Was in an exam so I don't have it

It seems correct to me, since total equity is the amount invested in a company by investors in exchange for stock, plus all subsequent earnings of the business, minus all subsequent dividends paid out.

We are given the owner's investment and net profit. I would assume dividends were not included in the income statement from your exam.

Going by this information we can use the Return on Equity ratio which would give the answer you found.

The question/wording is quite ambiguous, which is why the income statement would've been very helpful in this case.

 

[Ollier888]

It seems correct to me, since total equity is the amount invested in a company by investors in exchange for stock, plus all subsequent earnings of the business, minus all subsequent dividends paid out.

We are given the owner's investment and net profit. I would assume dividends were not included in the income statement from your exam.

Going by this information we can use the Return on Equity ratio which would give the answer you found.

The question/wording is quite ambiguous, which is why the income statement would've been very helpful in this case.

Perfect! Thanks.