Certified Valuation Analyst (CVA) Practice Exam

Return on assets (ROA) is calculated by which of the following methods?

1. Net income divided by total assets at the end of the period

2. Net income divided by the average of total assets at the beginning and end of the period

3. Average total assets divided by net income

4. Total revenue divided by total assets

The correct answer is: Net income divided by the average of total assets at the beginning and end of the period

Return on assets (ROA) is indeed most accurately calculated by dividing net income by the average of total assets at the beginning and end of the period. This method provides a more accurate representation of how effectively a company is using its assets to generate earnings over the time frame considered, as it smooths out any fluctuations in asset levels throughout the period. The logic behind using the average of total assets is that it accounts for changes in the asset base, reflecting the fact that asset levels can vary significantly during a financial period due to factors such as acquisitions, asset sales, or depreciation. Using a single point in time measurement (like total assets at the end of the period) may not accurately convey how assets have contributed to the net income generated over that entire period. Other methods provided in the options do not align with the standard definition of ROA, as they either misstate the relationship between net income and asset utilization or incorrectly represent the calculation needed to assess how well a business is managing its assets in generating profit.