FA Module 4 Profitability ratios practice exam questions

covering long-term debt, short term debt, other liabilities, common stock, additional paid-in capital, retained earnings, shareholders’ equity, financial leverage, net income, shareholder dividends, return on equity.



(The attached PDF file has better formatting.)

A firm’s balance sheet shows

    December 31, 20X1    December 31, 20X2
Long-term and short term debt    84    91
Other liabilities    14    37
Common stock + additional paid-in capital    85    72
Retained earnings    32    49


The firm declared and paid shareholder dividends of 33 in 20X2.

Question 4.1: Shareholders’ equity

What is shareholders’ equity at December 31, 20X1 and 20X2?

Answer 4.1: (add stock and retained earnings)

●    December 31, 20X1: 85 + 32 = 117
●    December 31, 20X2: 72 + 49 = 121


Question 4.2: Total assets

What are total assets at December 31, 20X1 and 20X2?

Answer 4.2: (total assets = debt + other liabilities + shareholders’ equity)

●    December 31, 20X1: 84 + 14 + 117 = 215
●    December 31, 20X2: 91 + 37 + 121 = 249


Question 4.3: Financial leverage

What is the financial leverage at December 31, 20X1 and 20X2?

Answer 4.3: (financial leverage = total assets / shareholders’ equity)

●    December 31, 20X1: 215 / 117 = 1.838
●    December 31, 20X2: 249 / 121 = 2.058


Question 4.4: Net income

What is net income in 20X2?

Answer 4.4: 33 + (49 – 32) = 50

(net income = shareholder dividends + Δ(retained earnings) )

Question 4.5: Return on equity

What is the return on equity in 20X2?

Answer 4.5: 50 / ( (117 + 121) / 2) = 42.02%

(return on equity = net income / average shareholders’ equity)


Question 4.6: Return on assets

What is the return on assets in 20X2?

Answer 4.6: 50 / ( ( 215 + 249) / 2) = 21.55%

(return on assets = net income / average assets)