Question

Which of the following transactions results in a decrease in the return on assets ratio?

Answer 1

The options are

A. Increasing the sales price of the products sold.

B. An increase in the net profit margin ratio.

C. Purchasing land by signing a long-term note payable.

D. Collecting cash from an account receivable.

Answer:

Purchasing land by signing a long term note payable will decrease the return on assets ratio will result in a decrease in the return on assets ratio.

Option C

Explanation:

Return on assets ratio shows the profit percentage that a company or business entity earns in accordance to its overall resources. It is calculated by the following formula,

$\text{ Return on assets }= \frac{ \text{Net income} }{ \text{Average total assets} }$

Purchasing a land will increase the average total assets of the company. Here in accordance with the formula, if the denominator increases and the numerator remains the same, it will ultimately decrease the quotient i.e. the return on assets.

Other options:

A. Increasing the sales price of the products sold - This will increase the net income which would result in the increase of ROA.

B. An increase in the net profit margin ratio - This will also increase the net income which would lead to the increase of ROA.

D. Collecting cash from an account receivable - accounts receivable will  neither affect the net income nor the average total assets. Therefore, the ROA will remain the same.