Which formula \"calculates\" the return on assets ratio? A. (Net Income + Intere

Question

Which formula "calculates" the return on assets ratio?

A.   (Net Income + Interest Expense)/Average Assets.
B.   (Net Income + Extraordinary Items)/Average Assets
C.   (Net Income + Discontinued Operations)/Average Assets
D.   (Net Income + Income Tax Expense)/Average Assets.
E.   None of these.
Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other measures. What type of ratio is the return on equity ratio?

A.   Liquidity.
B.   Turnover.
C.   Profitability.
D.   Other.
E.   None of these.
Taylor Company had net income of $50,000, paid income taxes of $20,000, and had before tax interest expense of $10,000. What was Taylor's times interest earned ratio?

A.   5
B.   6
C.   7
D.   8
E.   None of these. Which formula "calculates" the return on assets ratio?

A.   (Net Income + Interest Expense)/Average Assets.
B.   (Net Income + Extraordinary Items)/Average Assets
C.   (Net Income + Discontinued Operations)/Average Assets
D.   (Net Income + Income Tax Expense)/Average Assets.
E.   None of these.
Financial statement ratio analysis may be undertaken to study liquidity, turnover, profitability, and other measures. What type of ratio is the return on equity ratio?

A.   Liquidity.
B.   Turnover.
C.   Profitability.
D.   Other.
E.   None of these.
Taylor Company had net income of $50,000, paid income taxes of $20,000, and had before tax interest expense of $10,000. What was Taylor's times interest earned ratio?

A.   5
B.   6
C.   7
D.   8
E.   None of these.

Explanation / Answer

Return on assets ratio - (Net Income + Interest Expense) / Average Assets

Interest expense is added because average asset includes assets funded by both debt and equity so both interest expense and net income should be added to make a good representative of denominator

Return on equity ratio is an example of profitability ratio as it tries to determine the profit earned as a % of equity investors investment.

Times Interest Earned Ratio = EBIT / Interest Expense

EBIT = Net Income + Taxes + Interest Expense = 50000 + 20000 + 10000 = 80000

TIE Ratio = 80000 / 10000 = 8

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