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23 September, 12:41

Last year, the Miller Company reported a return on assets of 15 percent and an asset turnover of 1.6. In the current year, the company reported a return on assets of 19 percent but an asset turnover of only 1.2. If sales revenue remained unchanged from last year to the current year, what would explain the two ratio results?

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  1. 23 September, 12:47
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    b. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to increase.

    Explanation:

    The options are as follows

    a. Asset turnover decreased, therefore, total assets had to decrease. If total assets decreased, yet the return on assets also increased, then net income also had to increase.

    b. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to increase.

    c. Asset turnover decreased, therefore, total assets had to decrease. If total assets decreased, yet the return on assets also increased, then net income also had to decrease.

    d. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to decrease.

    Let us assume the sales is $100,000

    So, the asset turnover equal to

    Asset turnover = Sales : Total Assets

    1.6 = $100,000 : Total assets

    Total assets = $62,500

    Now the return on assets equal to

    Return on assets = Profit : Total Assets

    15% = Profit : $62,500

    So, the profit is $9,375

    Now in the current year

    The asset turnover equal to

    Asset turnover = Sales : Total Assets

    1.2 = $100,000 : Total assets

    Total assets = $83,333.33

    Now the return on assets equal to

    Return on assets = Profit : Total Assets

    19% = Profit : $83,333.33

    So, the profit is $15,833.33

    Now the increase in asset and profit is

    Increase in asset = ($83,333.33 - $62,500) : (62500)

    = 33.33%

    And, the increase in profit is

    = ($15,833.33, - $9,375) : ($9,375)

    = 68.89%

    As we can see that the increase in asset decreased but at the same time the increase in profit increases that results in increases in total assets and the increment in return on assets.
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Home » Business » Last year, the Miller Company reported a return on assets of 15 percent and an asset turnover of 1.6. In the current year, the company reported a return on assets of 19 percent but an asset turnover of only 1.2.
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