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 is the correct equation for computing Return on Assets (ROA)?

ROA = \frac{Gross\ Profit}{Total\ Liabilities}

ROA = \frac{Operating\ Expenses}{Average\ Total\ Assets}

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

ROA = \frac{Net\ Sales}{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 expressed as a percentage and is calculated using the formula ROA = Net Income / Average Total Assets.

Step 2: Analyze the options provided in the problem. The goal is to identify the formula that correctly represents ROA. Carefully review each formula and compare it to the standard definition of ROA.

Step 3: Eliminate incorrect options. For example, ROA is not calculated using Gross Profit or Operating Expenses, as these do not directly measure profitability relative to assets. Similarly, Net Sales divided by Total Equity does not align with the definition of ROA.

Step 4: Confirm the correct formula. The correct formula for ROA is ROA = Net Income / Average Total Assets, as it directly measures the profitability generated by the company's assets over a period.

Step 5: Apply the formula in practice. To calculate ROA, you would take the company's Net Income (found on the income statement) and divide it by the Average Total Assets (calculated as the average of the beginning and ending asset balances for the period).