Question

Flitter reported net income of $25,500 for the past year. at the beginning of the year the company had $216,000 in assets and $66,000 in liabilities. by the end of the year, assets had increased to $316,000 and liabilities were $91,000. calculate its return on assets:

Answer 1

Answer:

There are two ways in which Return on Assets can be calculated depending on whether we consider Total assets at year-end or average total assets.

$Return on Assets = \frac{Net Income}{Total Assets at year end}$   1

                                                          or

$Return on Assets = \frac{Net Income}{Average Assets}$       2

Substituting the values in equation 1 we get,

$Return on Assets = \frac{25500}{316000}$

$Return on Assets = \frac{25500}{316000}$

$Return on Assets = 0.080696203 or 8.07%$

Substituting values in equation 2 we get,

$Return on Assets = \frac{Net Income}{Average Assets}$

$Return on Assets = \frac{Net Income}{\frac{Assets at beginning + Assets at year end}{2}}$

$Return on Assets = \frac{25500}{\frac{216000 + 316000}{2}}$

$Return on Assets = \frac{25500}{266000}$

$Return on Assets = 0.095864662 or 9.58%$