Question

Return on Assets (ROA) and what is expected when assets increase:

A. ROA decreases as assets increase.
B. ROA remains constant regardless of asset changes.
C. ROA increases with higher asset utilization.
D. ROA is unrelated to changes in assets.

Answer 1

When assets increase, the Return on Assets (ROA) decreases. This is because the ROA is calculated by dividing the net income by the total assets, and if the net income remains constant and the assets increase, the ROA will decrease.

Step-by-step explanation:

When assets increase, the Return on Assets (ROA) can be impacted. The ROA is calculated by dividing the net income by the total assets. If the net income remains constant and the assets increase, the ROA will decrease. This is because the denominator (total assets) increases while the numerator (net income) stays the same.

For example, let's say a company has a net income of $50,000 and total assets of $500,000, resulting in an ROA of 10% (50,000/500,000). Now, if the company's total assets increase to $1,000,000 but the net income remains the same, the new ROA would be 5% (50,000/1,000,000).

Therefore, the correct answer is A. ROA decreases as assets increase.