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 of the following financial ratios is most directly used to measure a company's Return on Assets (ROA)?

Net Income divided by Average Total Assets

Gross Profit divided by Net Sales

Current Assets divided by Current Liabilities

Total Liabilities divided by Total Equity

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Verified step by step guidance

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 as Net Income divided by Average Total Assets.

Analyze the options provided: The correct formula for ROA is Net Income divided by Average Total Assets. Other options, such as Gross Profit divided by Net Sales, Current Assets divided by Current Liabilities, and Total Liabilities divided by Total Equity, measure different aspects of financial performance or position.

Identify why Net Income divided by Average Total Assets is the correct choice: Net Income represents the profit generated by the company, and Average Total Assets represent the resources used to generate that profit. Dividing these two values provides a direct measure of asset efficiency.

Clarify why the other options are incorrect: Gross Profit divided by Net Sales measures gross profit margin, Current Assets divided by Current Liabilities measures liquidity (current ratio), and Total Liabilities divided by Total Equity measures financial leverage (debt-to-equity ratio). None of these directly measure ROA.

Conclude that the correct financial ratio to measure Return on Assets (ROA) is Net Income divided by Average Total Assets, as it directly evaluates the efficiency of asset utilization in generating profit.