How to Measure Financial Performance

Part A 

Retained earnings amount for the year’s balance sheet = Net income for the current year – paid out dividends (Horngren, Sundem & Elliott, 2014). 

( 000) ( 000) 

Retained earnings brought forward $450,000 

Bigco Net income $35,000 

$485,000 

Less: Dividends 

Preferred $5,000 

Common Shareholders $6,000 

Special onetime $10,000 ( $21,000) 

Retained earnings $464,000 

Part B 

Opening stock + purchases – closing stock = Cost of goods sold 

Cost of sales $45,000,000 

Opening stock $16,000,000 

Closing stock $18,000,000 

Purchases $- 

Opening stock + purchases – closing stock = Cost of goods sold 

Purchases =Cost of goods sold –opening stock + closing stock (Horngren, Sundem & Elliott, 2014). 

= 45,000,000 – 16,000,000 +18,000,000 

=$47,000,000 

Part C 

Star Inc Year 1 data 

Revenues $80 million 

Net Income $9 million 

Assets $65 million 

Equity $40 million 

Year two data 

Revenues $87 million 

Net income $22 million 

Assets $70 million 

Equity $50 million 

Return on Equity calculation using DuPoint 

ROE = Net profit margin X Asset turnover X Equity multiplier (Berk & DeMarzo, 2014). 

Profit margin = 

For year 1 

= 

= 0.1125 or 11.25% 

For year 2 

= 

= 0.25287 or 25.3% 

Asset turnover = 

Year 1 

= 

= 1.231 or 123.1% 

Year 2 

= 

=1.243 or 124.3% 

Equity multiplier = 

Year 1 

= 

=1.625 or 162.5% 

Year 2 

= 

=1.4 or 140% 

ROE = Profit margin * Asset turnover * Equity multiplier 

Year 1 Return on Equity 

= 0.1125 * 1.231 * 1.625 

= 0.225 or 22.5% 

Year 2 ROE 

= 0.253 * 1.243 * 1.4 

= 0.44 or 44% 

Direct Return on Equity 

ROE =  (Berk & DeMarzo, 2014). 

Year 1 

= 

= 0.225 or 22.5% 

Year 2 

= 

=0.44 or 44% 

Direct Return on Equity and the DuPoint method yield the same results. The duPoint helps in the analysis as to why the ROE increased or decreased. The duPoint can be used to to obtain the clarity of on the current situation of the company being analysed. The ROE changed between year 1 and year 2 due to the changes in the net income which was not proportionate to the change in equity. Net income more than doubled yet equity increased by $10 million thus contributing to the difference 

References 

Berk, J., & DeMarzo, P. (2014).  Corporate finance  (3rd ed.). Harlow: Pearson Education Limited. 

Horngren, C., Sundem, G., & Elliott, J. (2014).  Introduction to financial accounting . Harlow: Pearson Education Limited.