Question

6. What are the formulas for the following: ROA, Current Ratio, Debt Ratio? What accounting statement(s) would we need to calculate each of these three ratio (Be specific)? (6 points)

I need this answered in detail at least a paragraph

Answer 1

The formulas for the given ratios are:

Return on assets (ROA) = Net income / Average total assets * 100

where, Average total assets = Beginning assets + Ending assets / 2

Current ratio = Current assets / Current liabilities

Debt ratio = Total liabilities / Total assets

Required accounting statements:

For Return on assets ratio: In this ratio, net income is in numerator. This net income can be found in income statement. In the denominator, average assets are taken. The figures of assets are given in the Balance sheet.

For current ratio: Only balance sheet is needed for finding the current ratio. In the numerator for this ratio, current assets are taken. Current assets are those assets that can be realized or converted into cash within one year. Examples are cash, accounts receivables, inventory. In the denominator, current liabilities are taken. Current liabilities are those liabilities that are to be settled or paid within one year. Examples are Accounts payable, Accrued expenses, income tax payable. All these figures are available in the balance sheet.

For Debt ratio: Only balance sheet is needed for finding the debt ratio. In the numerator for this ratio, total liabilities are taken. Total liabilities are given in the balance sheet. In the denominator, total assets are taken, these are also given in the balance sheet..