Question

Flitter reported net income of $25,500 for the past year. at the beginning of the year the company had $216,000 in assets and $66,000 in liabilities. by the end of the year, assets had increased to $316,000 and liabilities were $91,000. calculate its return on assets:

Answer 1

There are two ways in which Return on Assets can be calculated depending on whether we consider Total assets at year-end or average total assets.

`Return on Assets = (Net Income)/(Total Assets at year end)` 1

or

`Return on Assets = (Net Income)/(Average Assets)` 2

Substituting the values in equation 1 we get,

`Return on Assets = (25500)/(316000)`

`Return on Assets = (25500)/(316000)`

`Return on Assets = 0.080696203  or 8.07%`

Substituting values in equation 2 we get,

`Return on Assets = (Net Income)/(Average Assets)`

`Return on Assets = (Net Income)/((Assets at beginning + Assets at year end)/(2))`

`Return on Assets = (25500)/((216000 + 316000)/(2))`

`Return on Assets = (25500)/(266000)`

`Return on Assets = 0.095864662 or 9.58%`