If net earnings for the year were $30,000 and the annual rate of return on assets is 5%, the implied total assets are what?

If net earnings for the year were $30,000 and the annual rate of return on assets is 5%, the implied total assets are what?

• A. $600,000
• B. $500,000
• C. $360,000
• D. $1,000,000

Answer: (A)

Rate of return on assets measures how much earnings are generated per dollar of assets. If net earnings are 30,000 and the ROA is 5%, the total assets must be large enough that 5% of that asset base equals 30,000. Do the math: total assets = 30,000 ÷ 0.05 = 600,000. Checking gives 0.05 × 600,000 = 30,000, so this asset level produces the required return. For comparison, using the other asset levels would yield different ROAs: 30,000 on 500,000 would be 6%, on 360,000 about 8.3%, and on 1,000,000 about 3%. Only 600,000 aligns with a 5% return.

Rate of return on assets measures how much earnings are generated per dollar of assets. If net earnings are 30,000 and the ROA is 5%, the total assets must be large enough that 5% of that asset base equals 30,000. Do the math: total assets = 30,000 ÷ 0.05 = 600,000. Checking gives 0.05 × 600,000 = 30,000, so this asset level produces the required return.

For comparison, using the other asset levels would yield different ROAs: 30,000 on 500,000 would be 6%, on 360,000 about 8.3%, and on 1,000,000 about 3%. Only 600,000 aligns with a 5% return.