Multiple Choice
Which of the following financial ratios is most directly used to measure a company's Return on Assets (ROA)?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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Which of the following best describes the cash flow on total assets ratio?
A
It measures total assets as a percentage of operating cash flow.
B
It measures operating cash flow as a percentage of average total assets.
C
It measures cash dividends paid as a percentage of total assets.
D
It measures net income as a percentage of average total assets.
Verified step by step guidance1
Understand the concept of the cash flow on total assets ratio: This ratio measures the efficiency of a company's assets in generating operating cash flow. It is calculated by dividing operating cash flow by average total assets.
Identify the correct formula for the cash flow on total assets ratio: The formula is \( \text{Cash Flow on Total Assets Ratio} = \frac{\text{Operating Cash Flow}}{\text{Average Total Assets}} \).
Analyze the options provided in the problem: Compare each option to the definition and formula of the cash flow on total assets ratio.
Eliminate incorrect options: For example, the option 'It measures total assets as a percentage of operating cash flow' is incorrect because the ratio measures operating cash flow relative to average total assets, not the other way around.
Select the correct answer: Based on the analysis, the correct description is 'It measures operating cash flow as a percentage of average total assets.'
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