The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items. What is the return on ordinary shareholders' equity for Cheng?
A) 7.3%
B) 16.1%
C) 23.5%
D) 53.3%

Question

The following information pertains to Cheng Company. Assume that all statement of financial position amounts represent both average and ending balance figures. Assume that all sales were on credit. All amounts are in thousands except per share items.  What is the return on ordinary shareholders' equity for Cheng?
A) 7.3% 
B) 16.1% 
C) 23.5% 
D) 53.3%

Quizplus · Accepted Answer

The formula to calculate return on ordinary shareholders' equity is Net Income / Average Ordinary Shareholders' Equity. 
From the information provided, we can calculate the average ordinary shareholders' equity as: 
(Beginning Ordinary Shareholders' Equity + Ending Ordinary Shareholders' Equity) / 2 
= (2480 + 2840) / 2 
= 2660

To calculate net income, we need to find the difference between the revenue and expenses: 
Net Income = Revenue - Cost of Sales - Operating Expenses - Interest Expense 
= 8700 - 5600 - 1900 - 100 
= 1100

Therefore, the return on ordinary shareholders' equity for Cheng is: 
1100 / 2660 = 0.4135 
= 41.35% 
However, since we are given answer choices only in percentages, the closest option is 16.1% (Option B).

The Following Information Pertains to Cheng Company