Asked by Heather Jenkins on Jun 10, 2024
Verified
When computing the return on total assets, the interest expense is added back to net income to show what earnings would have been if the company had no debt.
Return On Total Assets
A financial metric that measures the efficiency of a company in generating profits from its total assets.
Interest Expense
The cost incurred by an entity for borrowed funds, reflected as a finance charge on the income statement.
Net Income
The total profit of a company after all expenses and taxes have been deducted from total revenue.
- Distinguish between the effects of various types of liabilities and equity on company's financial structure and ratios.
- Understand the calculation of returns, specifically return on total assets and return on equity, and their relevance to overall financial performance.
Verified Answer
CS
Courtney ShankJun 16, 2024
Final Answer :
True
Explanation :
The return on total assets formula is (Net Income + Interest Expense) / Total Assets. By adding back the interest expense, we can see the pure earnings generated from the assets without the influence of debt.
Learning Objectives
- Distinguish between the effects of various types of liabilities and equity on company's financial structure and ratios.
- Understand the calculation of returns, specifically return on total assets and return on equity, and their relevance to overall financial performance.