A decrease in the return on equity ratio could be caused by an increase in
A)tax rate.
B)cost of goods sold.
C)total assets.
D)both B and C.

Question

Quizplus · Accepted Answer

The return on equity (ROE) ratio is calculated by dividing net income by shareholder's equity. An increase in the cost of goods sold would decrease net income, therefore decreasing the ROE ratio. Similarly, an increase in total assets without a corresponding increase in net income would also decrease the ROE ratio. A change in tax rate would not directly affect the numerator or denominator used to calculate the ROE ratio, so it would not be a likely cause for a decrease in the ratio.

A Decrease in the Return on Equity Ratio Could Be