Which of the following best describes how Return on Assets (ROA) is calculated?

• A. Net income divided by average total assets
• B. Total equity divided by net income
• C. Net income divided by total liabilities
• D. Total assets divided by net income

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of Return on Assets (ROA). ROA is a financial ratio that measures how efficiently a company uses its assets to generate profit. It is expressed as a percentage and is calculated using net income and average total assets.
2. Step 2: Identify the formula for ROA. The formula is: ROA = Net Income / Average Total Assets. This formula highlights the relationship between the profit generated (net income) and the resources used (average total assets).
3. Step 3: Clarify the components of the formula. Net income is the profit after all expenses, taxes, and costs have been deducted. Average total assets are calculated by taking the sum of the beginning and ending total assets for a period and dividing by two.
4. Step 4: Compare the given options to the formula. The correct option should match the formula for ROA, which is Net Income divided by Average Total Assets. Eliminate options that involve total equity, total liabilities, or total assets divided by net income, as these do not align with the ROA formula.
5. Step 5: Confirm the correct answer. Based on the formula and the explanation, the correct description of ROA calculation is 'Net income divided by average total assets.'