Chapter 9, Problem 11CDQ

To determine

Concept Introduction:

Return on total Assets:

The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  $Returnonassets=\frac{Netincome}{AverageTotalAssets}$

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  $AveragetotalAssets=\frac{\left(Beginningtotalassets+Endingtotalassets\right)}{2}$

Return on Equity:

Return on Equity is the rate of return earned by the stockholders on their investment in the company. It is calculated with the help of following formula:

  $\mathrm{Re}turnonEquity=\frac{NetIncome}{AverageStockholder’sEquity}$

The Average stock holder's equity calculated with the help of following formula:

  $Averagestockholder’sequity=\frac{( Beginningstockholder’sequity+Endingstockholder’sequity)}{2}$

To Indicate:

The Difference between the Return on Total assets and Return on Equity and the higher value.