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Accounting for Managers




                    Notes

                                     Notes       Standard norm of the ratio:

                                     Lower the ratio, the more favourable and better the firm's position is, which highlights
                                     the percentage of absorption, cost of goods sold and operating expenses out of sales and
                                     vice versa. The lower ratio leads to a higher margin of operating profit.

                                   Return on Assets Ratio

                                   This ratio portrays the relationship in between the earnings and total assets employed in the
                                   business enterprise. It highlights the effective utilization of the assets of the firm through the
                                   determination of return on total assets employed.
                                                   Net Profit After Taxes
                                   Return on Assets =                  100
                                                   Average Total Assets

                                        Example: If one company has an income of  1 crore and total assets of  10,00,000, what will
                                   be the return on assets if net profit after taxes is  500000?
                                   Solution:
                                                   Net Profit After Taxes  5,00,000
                                   Return on Assets =                 100           100  50%
                                                   Average Total Assets    1,00,0000




                                     Notes       Standard norm of the ratio:
                                     Higher the ratio illustrates that the firm has greater effectiveness  in the  utilization  of
                                     assets, means greater profits reaped by the total assets and vice-versa.

                                   Return on Capital Employed

                                   The ratio illustrates that how much return is earned in the form of Net profit after taxes out of the
                                   total capital employed. The capital employed is nothing but the combination of both non current
                                   liabilities and owners' equity. The ratio expresses the relationship in between the total earnings
                                   after taxation and the total volume of capital employed.
                                                                  Net Profit After Taxes
                                   Return on Total Capital Employed =                 100
                                                                 Total Capital Employed




                                     Notes       Standard norm of the ratio:
                                     Higher the ratio is better the utilization of the long term funds raised under the capital
                                     structure means that greater profits are earned out of the total capital employed.


                                        Example: In the previous example, if the total capital employed is worth  25,00,000, what
                                   is the return on total capital employed?





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