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 best describes how to calculate a company's Return on Assets (ROA) for the current year?

ROA = Net Income / Average Total Assets

ROA = Net Income / Total Liabilities

ROA = Total Assets / Net Income

ROA = Net Sales / 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 calculated by dividing Net Income by Average Total Assets.

Step 2: Identify the correct formula for ROA. The formula is ROA = Net Income / Average Total Assets. This formula highlights the relationship between the company's profitability (Net Income) and the resources it has employed (Average Total Assets).

Step 3: Clarify why other options are incorrect. For example, ROA = Net Income / Total Liabilities is incorrect because liabilities are not part of the asset base used to generate income. Similarly, ROA = Total Assets / Net Income is incorrect because it reverses the intended relationship. ROA = Net Sales / Total Assets is also incorrect because Net Sales does not directly measure profitability.

Step 4: To calculate ROA for the current year, gather the necessary data: Net Income from the income statement and Average Total Assets, which is calculated as (Beginning Total Assets + Ending Total Assets) / 2.

Step 5: Apply the formula ROA = Net Income / Average Total Assets using the gathered data. Ensure that the Average Total Assets are calculated correctly to reflect the average asset base over the year.