Question

What was Mike’s ROA for the year?
Mike Smith has the following financial data.

Investment Assets at Year End

$475,000

Investment Assets at Beginning of the Year

$392,000

Savings Made During the Year by Mike

$27,000

Employer Match to Mike’s 401(k) Plan

$5,000

Total Assets on Ending Statement of Financial Position

$725,000

Gross Income on Income Statement

$100,000

Total Assets on Beginning Statement of Financial Position

$600,000

Total Liabilities at Beginning of the Year

$200,000

Total Liabilities at Year End

$180,000

----------------------------------------

11.33.

13.00.

14.84.

15.50.

Answer 1

Answer :- Option a). 11.33 %

Solution :- Return on Assets (ROA) = (Net income / Average total assets) * 100

Reduction in liabilities during year = Total liabilities at year beginning - Total liabilities at year end.

= 200000 - 180000

= 20,000.

Net income = Gross income of Mike - (Reduction in liabilities + Employer contribution to Retirement plan of Mike).

= 100000 - (20000 + 5000)

= 100000 - 25000

= $ 75000.

Average total assets = (Total assets at year beginning + Total assets at year end) / 2

= (600000 + 725000) / 2

= 1325000 / 2

= $ 662500.

Accordingly, Return on assets (ROA) = (75000 / 662500) * 100

= 0.113 * 100 i.e., 11.3 % (Most nearest to 11.33 % mentioned in Option A).

Conclusion :- ROA = 11.33 % (Option A).