Question

Torrid Romance Publishers has total receivables of $2,800, which represents 20 days’ sales. Total assets are $73,000. The firm’s operating profit margin is 5.9%. Find the firm's ROA and asset turnover ratio. (Use 365 days in a year. Do not round intermediate calculations. Round your final answers to 2 decimal places.)

Answer 1

Answer:

ROA=4.13

Asset turnover ratio = 0.70 times

Explanation:

1.Computation for ROA

Using this formula

ROA=Net income/Total assets

First step is to find Day's sales in receivables before calculating for the sales amount

Day's sales in receivables = Numbers of days in a year/Total receivables days sales

Let plug in the formula

Day's sales in receivables = 365 / 20

Day's sales in receivables = 18.25times

Now let find the Sales amount using this formula

Sales= Day's sales in receivables× Total receivables

Let plug in the formula

Sales = 18.25 times × $2,800

Sales=$51,100

Second step is to find the Net income

Using this formula

Net income =Percentage of Operating margin× Sales amount

Let plug in the formula

Net income=5.9%×$51,100

Net income =$3,014.90

Now let find the ROA using this formula

ROA=Net income/Total assets

Let plug in the formula

ROA=$3,014.90/$73,000

ROA=0.0413×100

ROA=4.13%

Therefore ROA will be 4.13%

2. Computation for asset turnover ratio

First step is to calculate for the Receivables turnover

Using this formula

Day's sales in receivables = Numbers of days in a year/Total receivables days sales

Let plug in the formula

Day's sales in receivables = 365 / 20

Day's sales in receivables = 18.25times

Second step is to find the Sales amount using this formula

Sales= Day's sales in receivables× Total receivables

Sales = 18.25 times × $2,800

Sales=$51,100

Now let calculate for the Asset turnover ratio using this formula

Asset turnover ratio = Sales / Total assets

Let plug in the formula

Asset turnover ratio= $51,100 / $73,000

Asset turnover ratio= 0.70 times

Therefore asset turnover ratio will be 0.70 times