Multiple Choice
What does a total asset turnover ratio of 1.5 times represent?
14. Financial Statement Analysis
Ratios: Total Asset Turnover
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Which of the following best describes how the total asset turnover ratio is calculated?
A
Total assets divided by net sales
B
Net income divided by average total assets
C
Net sales divided by average total assets
D
Net income divided by total liabilities
Verified step by step guidance1
Understand the concept of the total asset turnover ratio: This ratio measures how efficiently a company uses its assets to generate sales. It is a key performance indicator in financial analysis.
Identify the formula for the total asset turnover ratio: The formula is \( \text{Total Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Total Assets}} \).
Break down the components of the formula: 'Net Sales' refers to the revenue generated from the sale of goods or services, and 'Average Total Assets' is the average of the total assets at the beginning and end of the period.
Clarify why the correct answer is 'Net sales divided by average total assets': This aligns with the formula and the purpose of the ratio, which is to assess how effectively a company is using its assets to generate sales.
Eliminate the incorrect options: 'Total assets divided by net sales' is incorrect because it inverts the formula. 'Net income divided by average total assets' and 'Net income divided by total liabilities' are unrelated to the total asset turnover ratio and measure different financial metrics.
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