{"id":4134,"date":"2020-10-26T16:12:29","date_gmt":"2020-10-26T16:12:29","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-financialaccounting\/?post_type=chapter&#038;p=4134"},"modified":"2020-11-15T20:57:00","modified_gmt":"2020-11-15T20:57:00","slug":"return-on-assets","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/suny-clinton-financialaccounting\/chapter\/return-on-assets\/","title":{"raw":"Return on Assets","rendered":"Return on Assets"},"content":{"raw":"<div class=\"textbox learning-objectives\">\r\n<h3>Learning Outcomes<\/h3>\r\n<ul>\r\n \t<li style=\"font-weight: 400;\">Calculate the rate of return on total assets<\/li>\r\n<\/ul>\r\n<\/div>\r\nReturn on assets measures how effectively a company uses its assets to generate income. It is roughly equivalent to an investor\u2019s overall portfolio rate of return.\r\n\r\nTo calculate return on assets, add interest expense back to net income, and divide by average total assets.\r\n\r\n[latex]\\dfrac{\\text{interest expense} + \\text{net income}}{\\text{average total assets}}[\/latex]\r\n<div class=\"table-wrapper\">\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Income Statement\r\nFor the Years Ended December 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Other revenue and expenses<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 Gain on sale of investments<\/td>\r\n<td class=\"r\">$137,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>\u00a0 \u00a0 \u00a0 Interest expense<\/td>\r\n<td class=\"r\">(55,000)<\/td>\r\n<\/tr>\r\n<tr aria-hidden=\"true\">\r\n<td><\/td>\r\n<td class=\"line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income before income tax<\/td>\r\n<td class=\"r\">$314,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Income tax expense<\/td>\r\n<td class=\"r\">66,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td><strong>Net income<\/strong><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$248,000 <span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<table class=\"fin-table acctstatement\"><caption>Jonick Company\r\nComparative Balance Sheet\r\nDecember 31, 2019 and 2018<\/caption>\r\n<tbody>\r\n<tr>\r\n<th><\/th>\r\n<th scope=\"col\">2019<\/th>\r\n<th scope=\"col\">2018<\/th>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 <strong>Total current assets<\/strong><\/td>\r\n<td class=\"r\">$911,000<\/td>\r\n<td class=\"r\">$800,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Long-term investments:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>Investment in equity securities<\/td>\r\n<td class=\"r\">$1,946,000<\/td>\r\n<td class=\"r\">$1,822,000<\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><\/td>\r\n<\/tr>\r\n<tr>\r\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Property, plant and equipment:<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\u00a0 \u00a0 \u00a0 <strong>Total property, plant and equipment<\/strong><\/td>\r\n<td class=\"r\">$1,093,000<\/td>\r\n<td class=\"r\">$984,000<\/td>\r\n<\/tr>\r\n<tr class=\"highlight\">\r\n<td>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0<strong>Total assets<\/strong><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,950,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,606,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<\/div>\r\nIn our hypothetical example, net income is $248,000. Interest expense relates to financed assets, and it is added back to net income since how the assets are paid for should be irrelevant. This also makes the calculation more comparable between companies that use debt financing and companies that use equity financing.\r\n\r\nAdding back $55,000 in interest expense gives us $303,000 in investment income, divided by $3,778,000\u2014the average of beginning and ending total assets [latex]=\\dfrac{\\left(3,950,000+3,606,000\\right)}{2}[\/latex]\u2014equals a rate of return on assets of .08020116 or roughly 8%. The higher the rate of return, the better, and this will vary from industry to industry and also according to current economic conditions. For instance, if the Federal Reserve is using monetary policy to depress overall interest rates, 8% might be a good rate of return. If however, the stock market is returning 10% or better, an 8% rate of return might not be appealing to an investor.\r\n\r\nHowever, as with any high-level metric, this ratio has to be considered both in a larger context (e.g. over a long period of time) and as part of a larger analysis (e.g. other metrics, such as earnings per share or dividend payout may still make this an appealing investment.)\r\n\r\nNow that you have learned about\u00a0the rate of return on total assets, let's practice your understanding.\r\n<div class=\"textbox tryit\">\r\n<h3>PRACTICE QUESTION<\/h3>\r\nhttps:\/\/assessments.lumenlearning.com\/assessments\/23862\r\n\r\n<\/div>","rendered":"<div class=\"textbox learning-objectives\">\n<h3>Learning Outcomes<\/h3>\n<ul>\n<li style=\"font-weight: 400;\">Calculate the rate of return on total assets<\/li>\n<\/ul>\n<\/div>\n<p>Return on assets measures how effectively a company uses its assets to generate income. It is roughly equivalent to an investor\u2019s overall portfolio rate of return.<\/p>\n<p>To calculate return on assets, add interest expense back to net income, and divide by average total assets.<\/p>\n<p>[latex]\\dfrac{\\text{interest expense} + \\text{net income}}{\\text{average total assets}}[\/latex]<\/p>\n<div class=\"table-wrapper\">\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Income Statement<br \/>\nFor the Years Ended December 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th class=\"u-sr-only\" scope=\"col\">Description<\/th>\n<th scope=\"col\">2019<\/th>\n<\/tr>\n<tr>\n<td colspan=\"2\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Other revenue and expenses<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 Gain on sale of investments<\/td>\n<td class=\"r\">$137,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>\u00a0 \u00a0 \u00a0 Interest expense<\/td>\n<td class=\"r\">(55,000)<\/td>\n<\/tr>\n<tr aria-hidden=\"true\">\n<td><\/td>\n<td class=\"line-single\"><span class=\"u-sr-only\">Single Line<\/span><\/td>\n<\/tr>\n<tr>\n<td>Income before income tax<\/td>\n<td class=\"r\">$314,000<\/td>\n<\/tr>\n<tr>\n<td>Income tax expense<\/td>\n<td class=\"r\">66,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td><strong>Net income<\/strong><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$248,000 <span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<table class=\"fin-table acctstatement\">\n<caption>Jonick Company<br \/>\nComparative Balance Sheet<br \/>\nDecember 31, 2019 and 2018<\/caption>\n<tbody>\n<tr>\n<th><\/th>\n<th scope=\"col\">2019<\/th>\n<th scope=\"col\">2018<\/th>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span style=\"text-transform: uppercase;\"><strong>Assets<\/strong><\/span><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 <strong>Total current assets<\/strong><\/td>\n<td class=\"r\">$911,000<\/td>\n<td class=\"r\">$800,000<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Long-term investments:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>Investment in equity securities<\/td>\n<td class=\"r\">$1,946,000<\/td>\n<td class=\"r\">$1,822,000<\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><\/td>\n<\/tr>\n<tr>\n<td colspan=\"3\"><span class=\"u-sr-only\">Subcategory, <\/span><strong>Property, plant and equipment:<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\u00a0 \u00a0 \u00a0 <strong>Total property, plant and equipment<\/strong><\/td>\n<td class=\"r\">$1,093,000<\/td>\n<td class=\"r\">$984,000<\/td>\n<\/tr>\n<tr class=\"highlight\">\n<td>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0<strong>Total assets<\/strong><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,950,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<td class=\"r line-single line-double\"><span class=\"u-sr-only\">Single Line<\/span>$3,606,000<span class=\"u-sr-only\">Double Line<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<p>In our hypothetical example, net income is $248,000. Interest expense relates to financed assets, and it is added back to net income since how the assets are paid for should be irrelevant. This also makes the calculation more comparable between companies that use debt financing and companies that use equity financing.<\/p>\n<p>Adding back $55,000 in interest expense gives us $303,000 in investment income, divided by $3,778,000\u2014the average of beginning and ending total assets [latex]=\\dfrac{\\left(3,950,000+3,606,000\\right)}{2}[\/latex]\u2014equals a rate of return on assets of .08020116 or roughly 8%. The higher the rate of return, the better, and this will vary from industry to industry and also according to current economic conditions. For instance, if the Federal Reserve is using monetary policy to depress overall interest rates, 8% might be a good rate of return. If however, the stock market is returning 10% or better, an 8% rate of return might not be appealing to an investor.<\/p>\n<p>However, as with any high-level metric, this ratio has to be considered both in a larger context (e.g. over a long period of time) and as part of a larger analysis (e.g. other metrics, such as earnings per share or dividend payout may still make this an appealing investment.)<\/p>\n<p>Now that you have learned about\u00a0the rate of return on total assets, let&#8217;s practice your understanding.<\/p>\n<div class=\"textbox tryit\">\n<h3>PRACTICE QUESTION<\/h3>\n<p>\t<iframe id=\"lumen_assessment_23862\" class=\"resizable\" src=\"https:\/\/assessments.lumenlearning.com\/assessments\/load?assessment_id=23862&#38;embed=1&#38;external_user_id=&#38;external_context_id=&#38;iframe_resize_id=lumen_assessment_23862\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><br \/>\n\t<\/iframe><\/p>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-4134\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Original<\/div><ul class=\"citation-list\"><li>Return on Assets. <strong>Authored by<\/strong>: Joseph Cooke. <strong>Provided by<\/strong>: Lumen Learning. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Principles of Financial Accounting. <strong>Authored by<\/strong>: Christine Jonick. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615\">https:\/\/web.ung.edu\/media\/university-press\/Principles-of-Financial-Accounting.pdf?t=1601063299615<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-sa\/4.0\/\">CC BY-SA: Attribution-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":90270,"menu_order":15,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Return on Assets\",\"author\":\"Joseph Cooke\",\"organization\":\"Lumen Learning\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Principles of Financial Accounting\",\"author\":\"Christine 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