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 formulas is used to calculate Return on Assets (ROA)?

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

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

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

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

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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 expressed as a percentage and provides insight into the company's operational efficiency.

Step 2: Identify the correct formula for ROA. The formula is ROA = \frac{Net\ Income}{Average\ Total\ Assets}. This formula divides the net income (profit after expenses and taxes) by the average total assets (the average value of assets over a period).

Step 3: Clarify the components of the formula. Net Income is found on the income statement and represents the company's profit. Average Total Assets is calculated by taking the sum of the beginning and ending total assets for a period and dividing by 2.

Step 4: Understand why other formulas are incorrect. For example, ROA = \frac{Net\ Income}{Total\ Equity} measures Return on Equity (ROE), not ROA. ROA = \frac{Net\ Sales}{Total\ Assets} is not a standard financial ratio, and ROA = \frac{Total\ Assets}{Net\ Income} is mathematically incorrect for calculating ROA.

Step 5: Apply the correct formula to calculate ROA in practice. Gather the Net Income and Average Total Assets from the financial statements, substitute them into the formula, and perform the division to determine the ROA percentage.