Question

Compute the Return on Total Assets for each company below. Which company has the better ratio...

Compute the Return on Total Assets for each company below. Which company has the better ratio and why? Interpret the ratio for that company in common language.

Company A Company B
Net Income 75,000 130,000
Total Assets - Beginning 100,000 250,000
Total Assets - Ending 200,000 300,000
Net Sales 500,000 600,000
Business   Accounting   
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Answer #1

Company A:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Average Total Assets = ($100,000 + $200,000) / 2
Average Total Assets = $150,000

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $75,000 / $150,000
Return on Total Assets = 50%

Company B:

Average Total Assets = (Beginning Total Assets + Ending Total Assets) / 2
Average Total Assets = ($250,000 + $300,000) / 2
Average Total Assets = $275,000

Return on Total Assets = Net Income / Average Total Assets
Return on Total Assets = $130,000 / $275,000
Return on Total Assets = 47.27%

Company A has better ratio.
Company A is utilizing its total assets more efficiently than Company B.

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