Accounting: Tools for Business Decision Making, 5th Edition

Published by Wiley
ISBN 10: 1118128168
ISBN 13: 978-1-11812-816-9

Chapter 13 - Financial Analysis: The Big Picture - Questions - Page 727: 19


Return on total assetsis= Net Income/Total Assets Total assets = common stock holders equity + outsiders liabilities Return on common stockholders equity= Net Income/Common Stockkholders'equity As the divider in first ratio is total Assets, which includes common stockholders' equity and outside liabilities, in the second ratio it is only common stockholders' equity. Hence the ratio is more in second case. Therefore return on total asset ratio is 7.6% and the Return on common stock holders' equity is 12.8%.

Work Step by Step

The difference between the two rates is due to outside liabilities.
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