Can some explain this one to me:
An auditor's analytical procedures indicate a lower than expected return on an equity method investment. This situation most likely could have been caused by:
A.
an error in recording amortization of the excess of the investor's cost over the investment's underlying book value.
B.
the investee's decision to reduce cash dividends declared per share of its common stock.
C.
an error in recording the unrealized gain from an increase in the fair value of available-for-sale securities in the income account for trading securities.
D.
a substantial fluctuation in the price of the investee's common stock on a national stock exchange.
A – is correct because – The return on common stockholders' equity is (net income less preferred dividends) divided by the average common stockholder's equity. Reducing the cash dividend of common stock or a fluctuation in the price of the investee's common stock would not affect this ratio.
English is not my first language…and I just do not get this explanation.
Return on Equity = (NI – Pref Div)/ Aver common stock. equity….
Lower ROE (return on equity) will be possible when numerator will go down or denominator will go up.
and I am not sure what is the next step.
Thanks
.