Communicating and Interpreting Accounting Information
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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Communicating and Interpreting Accounting Information Chapter 5
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Communicating and Interpreting Accounting Information. Chapter 5. Return on Assets. The return on assets ratio relates net income to average total assets. This ratio combines the firm ’ s income-generating strength (profit margin) and its revenue-generating effectiveness (asset turnover). - PowerPoint PPT Presentation
Transcript of Communicating and Interpreting Accounting Information
PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Communicating and Interpreting Accounting Information
Chapter 5
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Return on Assets
The return on assets ratio relates net income to average total assets.
– This ratio combines the firm’s income-generating strength (profit margin) and its revenue-generating effectiveness (asset turnover).
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ROA Profit Driven AnalysisROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.
ROA Net profit Margin
Net Sales
Total Average Asset
Net Income
Net Sales
Net Income
Average Total Asset
Total Asset Turnover
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ROA
Net Profit margin :
Measure how much of every sales dollars is profit.A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors.It can increased by :
Increasing sales value.Increasing sales price.Decreasing cost of goods sold and operating expenses.
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ROATotal asset Turnover:
Measure how many sales dollars the company generate with each dollar of Assets.The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assetsIt can increased by :
Collecting accounts receivable more quickly.Centralizing distributors to reduce inventory kept on hand .Consolidation production facilities in fewer factories to reduce the amount of assets necessary to generate each dollar of sale.
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Exercise
The following information was taken from the income statement and balance sheet of The Mickey Company for the years 2010 and 2011:
Compute the following ratios for 2011: Net profit margin, Asset turnover, and Return on assets.
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Answer
Net profit margin = Net income / Net Sales
= $2,345 / $30,752 = .076 or 7.6%
Asset turnover = Net Sales / Net Average Assets
= $30,752 / $51,945* = .59
Return on assets = Net profit margin Asset turnover
Return on assets = .076 X .59
=.045 =4.5 %
* Net average assets = $49,988 + $53,902 /2
