Relationships among Return on Assets, Return on Sales, and Asset Turnover A comp
ID: 2749538 • Letter: R
Question
Relationships among Return on Assets, Return on Sales, and Asset Turnover
A company's return on assets is a function of its ability to turn over its investment (asset turnover) and earn a profit on each dollar of sales (return on sales).
Required:
For each of the following independent cases, determine the missing amounts. (Note: Assume in each case that the company has no interest expense; that is, net income is used as the definition of income in all calculations.) Round to the nearest whole number.
$
Case 1 Net income $12,000 Net sales $38,400 Average total assets $120,000 Return on assets % Case 2 Net income $52,000 Average total assets $444,600 Return on sales 6% Net sales$
Case 3 Average total assets $56,000 Asset turnover 2 times Return on sales 4% Return on assets % Case 4 Return on assets 13% Net sales $35,000 Asset turnover 1.75 times Net income $ Case 5 Return on assets 14% Net income $7,000 Return on sales 4% Average total assets $Explanation / Answer
Case 1 Net income 12000 Net sales 38400 Average total assets 120000 Net income/Total asset Return on assets 10.00% An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Case 2 Net income 52000 Average total assets 444600 Return on sales 6% A ratio widely used to evaluate a company's operational efficiency. ROS is also known as a firm's "operating profit margin" Net sales 866666.67 Return os sales = net income/ sales; so sales = Net income/return on sales Case 3 Average total assets 56000 Asset turnover 2 times Return on sales 4% Sales 112000 Asset Turnover = Sales or Revenues / Total Assets Net income 4480 Return os sales = net income/ sales; so Net income=sales*return on sales Return on assets 8.00% Net income/Total asset;An indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Case 4 Return on assets 13% Net sales 35000 Asset turnover 1.75 times Total Asset 20000 Asset Turnover = Sales or Revenues / Total Assets Net income 2600 return on asset =Net income/Total asset Case 5 Return on assets 14% Net income 7000 Return on sales 4% Sales 175000 Return os sales = net income/ sales; so sales = Net income/return on sales Average total assets 50000 return on asset =Net income/Total asset