Question

why is interest added back to profit before tax when calculating return on total assets?

A. to reflect the fact that the efficient use of resources should be examined independently from the method of financing.

B. because it must be paid regardless of profits.

C.because interest rates are variable over time.

D. to indicate to lenders that some risk is involved

d. to indicate to lenders that some risk is involved

Answer 1

Answer is Option A

Explanation :

Return on Total assets ratio is the ratio which shows how efficient the assets are utilised and how much revenue the assets have generated. This efficient utilisation doesn't depend on the type of capital structure. It has to measure the revenue generation capacity and efficiency in utilisation of assets. The method of financing shouldn't impact the return on assets measurement. We should take Earnings Before Interest and Tax (EBIT) for measurement. So Option A is answer.