Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

14. Financial Statement Analysis

Ratios: Return on Assets (ROA)

Financial Accounting

14. Financial Statement Analysis

Ratios: Return on Assets (ROA)

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Multiple Choice

Which one of the following formulas correctly computes the Return on Assets (ROA)?

ROA = \frac{Gross\ Profit}{Net\ Sales}

ROA = \frac{Net\ Income}{Average\ Total\ Assets}

ROA = \frac{Total\ Assets}{Net\ Sales}

ROA = \frac{Net\ Income}{Total\ Equity}

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Verified step by step guidance

Step 1: Understand the concept of Return on Assets (ROA). ROA is a financial ratio that measures how efficiently a company uses its assets to generate profit. It is calculated by dividing Net Income by Average Total Assets.

Step 2: Analyze the given formulas. The correct formula for ROA is ROA = \( \frac{Net\ Income}{Average\ Total\ Assets} \). This formula directly relates the company's profitability (Net Income) to the resources it has employed (Average Total Assets).

Step 3: Eliminate incorrect options. For example, ROA = \( \frac{Gross\ Profit}{Net\ Sales} \) is not correct because it measures gross profit margin, not asset efficiency. Similarly, ROA = \( \frac{Total\ Assets}{Net\ Sales} \) and ROA = \( \frac{Net\ Income}{Total\ Equity} \) are formulas for other financial metrics, not ROA.

Step 4: Confirm the correct formula. The correct formula for ROA is \( \frac{Net\ Income}{Average\ Total\ Assets} \), as it aligns with the definition of ROA and measures the efficiency of asset utilization.

Step 5: Apply the formula in practice. To calculate ROA, gather the Net Income from the income statement and Average Total Assets from the balance sheet (calculated as the average of beginning and ending total assets for the period). Then, divide Net Income by Average Total Assets to compute ROA.