Question

In: Accounting

1. Assuming all other factors remain the same, a decrease in invested assets will: Increase ROI...

1. Assuming all other factors remain the same, a decrease in invested assets will:

  1. Increase ROI
  2. Decrease ROI
  3. Have no effect on ROI
  4. Decrease the profit margin

2. Assuming all other factors remain the same, a decrease in accounts receivables will:

  1. Increase ROI
  2. Decrease ROI
  3. Have no effect on ROI
  4. Decrease the profit margin

3. The profit margin and invested asset turnover ratio may be best considered as a:

a. profitability and efficiency measure

b. residual income and gross margin measure

c. a and b

d. none of the above

Solutions

Expert Solution

Answer 1 -

A decrease in invested assets will increase ROI.

Return on investment (ROI) =

(Net income / Average total assets) × 100

If invested assets are decreased, then denominator will be less as compared to numerator, which will yield higher percentage. Means ROI will increase.

Therefore, the correct answer is option a. INCREASE ROI.

Answer 2 -

A decrease in accounts Receivable will have no effect on ROI.

If there is decrease in accounts Receivable, means, cash is received from debtors. So Assets remain same. Cash is increased and accounts Receivable are decreased, giving nil effect on invested assets. Also, it does not have any effect on net income.

Therefore, the correct answer is option c. HAVE NO EFFECT ON ROI.

Answer 3 -

The profit margin and invested asset turnover ratio are best considered as profitability and efficiency measure.

Asset turnover ratio indicates how efficiently assets are used in generating revenue. How effectively assets are used.

Therefore, the correct answer is option a. PROFITABILITY AND EFFICIENCY MEASURE.

ekkarill92 answered 1 year ago
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