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 ratios are key components in measuring a company's operating efficiency, specifically as it relates to Return on Assets (ROA)?

Earnings Per Share and Price-to-Earnings Ratio

Net Profit Margin and Total Asset Turnover

Debt-to-Equity Ratio and Times Interest Earned

Current Ratio and Quick Ratio

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Verified step by step guidance

Understand the concept of Return on Assets (ROA): ROA measures how efficiently a company uses its assets to generate profit. The formula for ROA is typically expressed as:

\frac{Net Income}{Total Assets}

. It combines profitability and asset utilization.

Identify the components of ROA: ROA is influenced by two key factors: Net Profit Margin and Total Asset Turnover. Net Profit Margin measures profitability, while Total Asset Turnover assesses how efficiently assets are used to generate revenue.

Analyze the options provided: Evaluate each pair of ratios to determine their relevance to ROA. For example, Earnings Per Share and Price-to-Earnings Ratio are related to stock performance, not operating efficiency. Debt-to-Equity Ratio and Times Interest Earned focus on financial leverage and solvency, not asset efficiency. Current Ratio and Quick Ratio measure liquidity, not profitability or asset utilization.

Focus on Net Profit Margin and Total Asset Turnover: These two ratios directly contribute to ROA. Net Profit Margin is calculated as

\frac{Net Income}{Revenue}

, and Total Asset Turnover is calculated as

\frac{Revenue}{Total Assets}

. Together, they explain how profitably and efficiently a company uses its assets.

Conclude that Net Profit Margin and Total Asset Turnover are the correct answer: These ratios are the key components in measuring a company's operating efficiency as it relates to ROA, aligning with the formula and purpose of ROA.