Multiple Choice
Which of the following best describes the cash flow on total assets ratio?
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14. Financial Statement Analysis
Ratios: Return on Assets (ROA)
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XYZ Company had net sales during the period of $380,000 and net income of $60,000. If total assets were $480,000 at the beginning of the period and $720,000 at the end of the period, what is the company's ROA?
A
8%
B
10%
C
13%
D
63%
Verified step by step guidance1
Understand the concept of Return on Assets (ROA): ROA is a financial ratio that indicates how profitable a company is relative to its total assets. It is calculated by dividing net income by average total assets.
Calculate the average total assets: To find the average total assets, add the total assets at the beginning of the period to the total assets at the end of the period, then divide by 2. Use the formula: \( \text{Average Total Assets} = \frac{\text{Beginning Total Assets} + \text{Ending Total Assets}}{2} \).
Substitute the given values into the formula for average total assets: \( \text{Average Total Assets} = \frac{480,000 + 720,000}{2} \).
Calculate ROA using the formula: \( \text{ROA} = \frac{\text{Net Income}}{\text{Average Total Assets}} \times 100 \). Substitute the net income and the average total assets into the formula.
Interpret the result: Compare the calculated ROA with the given options (8%, 10%, 13%, 63%) to determine which percentage matches the calculated ROA.
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