Question
In: Accounting
38. Anthony’s Services, Inc. reported the following balance sheet information for the year 2017. Based on...
38. Anthony’s Services, Inc. reported the following balance sheet information for the year 2017. Based on the following information, calculate ROTA (return on total assets). Total Assets, December 31, 2017 $586,000 Total Assets, December 31, 2016 $505,000 For Year Ended December 31, 2017: Interest Expense $27,000 Interest Income 20,000 Net Income $66,100 A) 7.93% B) 11.28% C) 17.07% D) 15.78% What does this result tell us?
Solutions
Expert Solution
The answer is c) 17.07%
Explanation:
Return on total assets (ROTA) =( Earnings before interest and tax ÷ Average total assets) × 100
= ($93,100 ÷ $545,500 ) × 100 = 17.07 %
Working Note : EARNINGS BEFORE INTEREST AND TAX (EBIT) = Net income + interest expense + tax
= $ 66,100 +$27,000 = $ 93,100 ( Tax is not given in question so not added )
AVERAGE TOTAL ASSETS =( Beginning total assets + Ending total assets) ÷ 2 , where aveage total assets should not include accumulated depreciation and any allowances for doubtful account.
= ($505,000 + $586,000) ÷2 = $545,500
ROTA tells you how efficiently the company is using the assets of the business to create return.This ratio tells how well the company can convert its investment in assets into profits.
Increase in ROTA means better use of assets to generate returns for firm.
The higher the ROTA the more productive and efficient management is in utilizing economic resources.
The higher the ROTA the more profit a company makes relative to its investment in assets.
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