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

What does a return on assets (ROA) of 12.5\% represent?

The company earns a 12.5\% return on its equity investments.

The company generates $0.125 in net income for every $1 of average total assets.

The company pays 12.5\% of its assets as dividends to shareholders.

The company has 12.5\% of its assets financed by debt.

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Verified step by step guidance

Understand the concept of Return on Assets (ROA): ROA is a financial ratio that measures how efficiently a company uses its average total assets to generate net income. It is expressed as a percentage and calculated using the formula: ROA = (Net Income / Average Total Assets) × 100.

Analyze the given ROA value: A ROA of 12.5% means that for every $1 of average total assets, the company generates $0.125 in net income. This indicates the company's efficiency in utilizing its assets to produce profit.

Eliminate incorrect interpretations: The statement 'The company earns a 12.5% return on its equity investments' is incorrect because ROA focuses on total assets, not equity investments. Similarly, 'The company pays 12.5% of its assets as dividends to shareholders' is unrelated to ROA, as dividends are not part of the ROA calculation. Lastly, 'The company has 12.5% of its assets financed by debt' is also incorrect, as ROA does not measure financing structure.

Identify the correct interpretation: The correct interpretation is 'The company generates $0.125 in net income for every $1 of average total assets,' as this directly aligns with the definition and calculation of ROA.

Conclude the explanation: ROA is a key profitability metric that helps stakeholders understand how effectively a company is using its assets to generate earnings. A higher ROA indicates better asset utilization and profitability.