How is the return on assets (ROA) calculated?



Q16. Return on assets (ROA)
How is the return on assets (ROA) calculated?

A16.
(1) Return on assets (ROA)
= Net income / Average total assets

(2) Average total assets
= (Beginning total assets + Ending total assets) / 2

[Entity 16-a]
Net income = $72,000
Beginning total assets = $750,000
Ending total assets = $850,000
Average total assets
= ($750,000 + $850,000) / 2
= $800,000
Return on assets (ROA)
= $72,000 / $800,000 = 9%

[Entity 16-b]
Net income = $67,500
Beginning total assets = $650,000
Ending total assets = $700,000
Average total assets
= ($650,000 + $700,000) / 2
= $675,000
Return on assets (ROA)
= $67,500 / $675,000 = 10%

[Note]
Higher return on assets (ROA) –> more profitable.
Thus in this example, Entity 16-b is more profitable than Entity 16-a.

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