University:
Grand Rapids Community College
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

322

Pages:

2
Author:

stud_ice13

Return on Assets (ROA) Return on Assets (ROA) is a key profitability measure that evaluates how effectively a company uses its assets to generate net income. It helps assess management’s efficiency in utilizing resources. The formula for ROA is: ROA=Net Income/Average Total Assets • • Net Income: Found on the income statement. Average Total Assets: Calculated by taking the average of the beginning and ending total assets for the period. Example: Nike's Return on Assets • • • Net Income: $4,029 million. Average Total Assets: 22,536+23,7172=23,127 million ROA: 4,02923,127×100=17.4% This 17.4% ROA indicates that Nike generates $17.40 of net income for every $100 of assets. Interpretation • • To determine if this ROA is good or bad, we compare it with previous years' ROAs or with competitors. For instance, Nike outperformed Under Armour, which had a negative ROA due to losses, and Nike's consistent positive returns indicate effective asset management. Decision-Making Example Consider a winter ski resort that earns a 21% ROA. If offered to purchase a ski equipment manufacturer with a 14% ROA, and the industry average ROA is 9%: • • The 14% ROA exceeds the industry average, making the investment attractive. However, it is lower than the resort's current 21% ROA, so investing in expanding the resort may yield higher returns than acquiring the manufacturer. Steps for Jasmine Worthy's Business (Expressions) To compute the return on assets for Jasmine Worthy's haircutting business, Expressions, follow these steps: 1. Income Statement: Summarize revenues and expenses for the period to compute net income. 2. Statement of Retained Earnings: Show changes in retained earnings due to net income and dividends. 3. Balance Sheet: List assets, liabilities, and equity as of December 31. 4. Statement of Cash Flows: Detail cash flows from operating, investing, and financing activities. 5. Return on Assets: o Use net income from the income statement. o Compute average total assets by averaging the beginning and ending balances for the period. For example, if Expressions has a net income of $1,000 and average total assets of $18,000, the ROA would be: ROA=1,00018,000×100=5.56% This means that for every $100 in assets, the business generates $5.56 in net income.