Certified Management Accountant 2025 – 400 Free Practice Questions to Pass the Exam

The DuPont Model for Return on Equity (ROE) provides a detailed analysis of a company's financial performance by breaking down ROE into its constituent components. This approach enhances the understanding of how different factors contribute to overall profitability and efficiency.

The correct answer emphasizes that ROE can be decomposed into three distinct ratios: first, net income divided by net sales, which indicates profitability; second, net sales divided by average total assets, representing asset efficiency or how well the company is utilizing its assets to generate sales; and finally, average total assets divided by average total equity, which highlights the company's leverage, or how much of its assets are financed by shareholders' equity.

This decomposition allows management and analysts to pinpoint specific areas that might require attention or improvement, such as increasing sales, managing costs, or optimizing asset utilization. By understanding these interrelations, a company can devise strategies that target the improvement of each individual ratio, subsequently enhancing its overall ROE.

The other options do not accurately represent the structure of the DuPont Model. For instance, one option refers to net income relative to total assets, which does not provide the same insights into profitability, efficiency, and leverage. Another option involves multiplying net income by total capital, which lacks the clarity of