AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Property-Plant-Equipment: Module 10 Slide 1 Hi everyone. Now that we have talked about property, plant, and equipment I’d like to wrap up the discussion dealing with a couple of ratios that relate to P, P, and E.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 And there are two of them, two financial statement ratios that relate to our property, plant, and equipment. We have the ROA, return on assets, and we have our asset turnover ratio.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 3 Let’s start with ROA. Return on assets measures the amount of profit that’s earned from each dollar that is invested in our assets. To calculate the ROA what we do is we’ll take our net income and divide by our average total assets. That equals the return on assets. To come up with that denominator, to calculate the average total assets, simply take the total assets at the beginning of the year plus the total assets at the end of the year and to get an average divide them by two.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Slide 4 The ROA, the return on assets, the idea here is this ratio measures the profitability of your assets by figuring out the amount of income that is generated from every dollar invested in your assets. For example, a return on assets of 15% means that 15 cents of income, 15 cents of profit was earned for every dollar that you have invested in your assets. Now think about this. This is a return. It’s how much profit we are earning for each dollar invested in assets. What would be a better number, a higher or a lower number? Of course higher is better. The higher the ROA the better the ratio is. Again remember, and we’ve seen this before when we talked about ratios previously, we don’t know if it’s a good ratio or not. We can’t put a value judgment on the ratio without some point of comparison. But we can say that for the return on assets, the higher the return the better the ratio is going to be. So that’s your ROA. That’s your return on assets.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 Slide 5 The other ratio that you need to be comfortable with related to property, plant, and equipment would be the asset turnover ratio. The asset turnover ratio measures how efficiently the company uses its assets to generate sales. Now to calculate the asset turnover take the net sales revenue and divide it by your average total assets. Now we already know to calculate the average total assets, the assets at the beginning of the year plus the total assets at the end of the year divided by two.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 6 Now let’s talk for a minute about the asset turnover ratio. Again the asset turnover ratio measures the efficiency of the company and using its assets in order to generate sales. The ratio is a measure of the dollar of sales that are produced for each dollar invested in assets. For example, an asset turnover of 0.62 would indicate that the company generated sales of 62 cents for every dollar invested in assets. So this tells us for each dollar invested in assets, the amount of sales that were generated from those assets. Again, in terms of is higher or lower better, with the asset turnover ratio higher is better. The higher the asset turnover ratio the more sales are being generated from your assets. But again we also want to remind you that we cannot place a value judgment on the ratio in terms of is it good or not without some point of